CC BY
37
CONTRIBUTION OF LIFE LONG LEARNING TO COMPANY'S VALUE GROWTH
Violeta Kasarova,
Ralitsa Dimitrova
INTRODUCTION
Access to relevant information and knowledge along with motivation and skills to use them intelligently has become in the 21-st century the key to increasing the competitiveness of companies and economies as well as to the improvement and adaptation of the work force on a European level. Today the traditional understanding of competitive advantage as acquisition of tangible assets (capital, land, raw materials, technologies) is not the only factor for business success. In a society based on knowledge, the future is determined by the abilities of the economic subjects, irrespective of their size and branch, to take advantage of their knowledge. Thus, the new criteria for economic growth are related to innovations and education. This obviously requires shifting of the strategic priorities to the intellectual capital of the companies at the expense of the more conservative financial capital.
In modern economic literature, intellectual capital is understood to refer to a set of intangible assets based on knowledge that brings benefit to society. According to T. Stewart, intellectual capital is a combination of patents, processes and management skills, technologies, expertise and information about consumers and suppliers1. Similarly, the views of K. Bradley and R. Albert2 are that knowledge and intangible assets have become a useful resource for creating competitive advantage for business. The International Federation of Accountants (IFAC) identifies three components in intellectual capital3: human, customer and organizational capital. This classification is derived from the structure of intellectual capital and was developed and applied to the practice by the Swedish insurance company "Skandia" (Fig. 1), which has included this capital in a special section of its annual financial statements since 19954.
1 Stewart, 1.А, „Brainpower”, Fortune, June 3,1991, p. 42-60/
2 Bradley, K., Albert, S, Intellectual Capital as the Foundation for New Conditions relating to Organizations and Management Practices, Working Paper Series No. 15, Milton Keynes Open University Business School, 1996.
3 Measurment and management of intellectual capital, IFAC, 1998.
4 Georgieva, T., Intellectual Capital of the Company. -http://im2.hit.bg/Text/Resources/8-13.pdf.
217
FINANCIAL CAPITAL
Л
Human Capital
COMPANY'S CAPITAL
INTELLECTUAL CAPITAL
IT
Structural Capital
Organizational
Customer
Process
Innovational
Fig.1. Structure of intellectual capital (based on Scandia's model1)
The structure of intellectual capital developed by „Skandia” defines most precisely its components and covers the whole set of intangible assets 2. Human capital occupies an important place in this structure and is treated as a combination of knowledge, skills, education, qualification, experience, habits, learning ability and loyalty. It characterizes the human side of the company and similarly to all other types of capital is the result of resource investments.
1 Power of Innovation. Intellectual Capital, Supplement to Skandia's 1996 Interim
Report.
http://www.skandia.com/en/includes/documentlinks/annualreport1996/e9606Power.pdf; Edvinsson, L., G. BrQnig, Aktiv Posten Wissens Kapital, Gabler.
2 Intangible assets are non-financial assets. Some of them are included in the financial statements of a company. According to Bulgarian legislation (Accounting standard 38 “Intangible assets”) they are: rights over industrial property ( trademark, copyright including computer software, brand name, rubrics and publishing rights, licenses and franchise, patents); concession rights, rights over technology such as recipes, formulas, models, designs, prototypes, instruments, matrices, patterns, etc. goodwill. This list, however, does not include a number of intangible assets (hidden valuables) which have no place in the financial statements nevertheless their contribution to the competitiveness and success of an organization. For example, this category includes loyalty to the customer, creativity and loyalty of the personnel, organizational culture, efficiency of the communication, management know-how, etc.
218
In the context of knowledge based economy, human capital becomes a major source of economic growth and a key factor for competitiveness.
The aim of this paper is to attempt to clarify the contribution of human capital to the value of a company.
LIFE LONG LEARNING AND HUMAN CAPITAL
In conditions of rapid development of technology and constantly changing requirements of the labor market, those who want to be competitive and up to the realities around them, can not rely only on the years spent in academic institutions. They should develop throughout their lives, through the mechanisms of the so-called Life Long Learning (LLL), i.e. life long (continued) acquisition of new knowledge and skills - from preschool to late old age. Thanks to these mechanisms the traditional diploma "for life" gradually loses its leading role. It is replaced by Portfolios: electronically stored Curriculum Vitae, which changes and is enriched over the years.
LLL is a mechanism for the formation and development of human capital in the context of competitiveness and people's employment, social cohesion, active citizenship and professional development because:
• it begins in early childhood, continues throughout the years of schooling and training, and may continue throughout higher education, continuing education or vocational training for adults;
• it includes training in the formal education system (schools and universities), non-formal education (e.g. at work) or informal training - at home or with friends and colleagues;
• it offers a "second chance" to acquire basic skills and new opportunities for learning at a specialized level.
Therefore, if LLL is the action, human capital is the result, directly affecting the economic systems. This effect explains, for example, the gap between the book value of public companies and their market value. If in 1980 the market capitalization exceeded the book value of public companies by 25%, now it reaches 300 percent excess1. According to information from Bloomberg agency, the market value of U.S. and European banks exceeds their book value 2.5-3.5 times.2
In other words, in the knowledge economy, human capital directly, and LLL indirectly, create added value, which requires the selection of
1 Ballow J., Burgman R., Roos G., Molnar R. A New Paradigm for Managing Shareholder Value. 2004.
2 Cited from Солдатова Е.В. Интеллектуальный капитал как стратегический
фактор стоимости коммерческого банка -
http://uecs.mcnip.ru/modules.php?name=News&file=article&sid=65.
219
appropriate metrics for measuring the knowledge assets in the companies and their contribution to the effectiveness of the company's business. This is necessary because, as P. Drucker noted , "the most important contribution of management in the 20th century was the growth in workers' productivity, while the 21 century's most important contribution will be the increase of the productivity of knowledge and the staff involved with it"1.
EVALUATION OF HUMAN CAPITAL CONTRIBUTION TO THE EFFICIENCY OF COMPANIES
Practically, the standard tools for evaluating the efficiency of business such as EBT - Earnings Before Taxes, ROI - Return on Investments, EPS -Earnings per Share and others do not give a clear enough picture for investors and managers to assess the real potential of the company in the strategic context of its development. According to B. Milner2 the ongoing processes in economy show that the capital in the traditional forms of tangible capital and financial capital gradually ceases to be the basis for assessing the value of the company as a major criterion for economic efficiency. The reason is the increasing role of intellectual assets as a source of competitiveness. These assets, according to R. Kaplan and D. Norton, are difficult to imitate by competitors, which makes them a powerful source of competitive advantage3. The thesis is supported by W. Buffett4 whose opinion is that as the investors pay for shares of a company they receive more than a generator of cash, namely they get the opportunity to participate in the increasing long-term potential for value creation based on intellectual capital.
An appropriate quantitative measure of the company value created with the participation of intellectual capital is the coefficient VAIC TM - Value added intellectual coefficient5. This measure provides a single basis for comparison between companies in different economies and economic branches and uses data from their financial statements.
The main idea of this indicator is that a successful value creation in the company is based on the coefficient of effective use of intellectual capital and the coefficient of effective use of invested capital6, or:
1 Drucker. P. California management review, 1999, vol. 41, No.2.
2 Мильнер Б. З. Управление знаниями. М. ИНФРА-М, 2003, с. 9.
3 Kaplan. R., Norton, D., Measuring the strategic readiness of intangible assets, Harvard business review February, 2004, p. 52-63.
4 Баффет,У., Эссе об инвестициях, корпоративных финансах и управлении компаниями, Альпина Бизнес Букс, Москва, 2005.
5 The measuring VAIC TM is a trademark of "Intellectual Capital Centre", Zagreb
6 Pulic, A. - Intellectual capital - does it create or destroy value?, Journal of Business Performance Management, vol.8, No.1, 2004/
220
VAIC TM = ICE + CEE
where: ICE - Intellectual capital efficiency coefficient; CEE - capital employed efficiency coefficient
The model treats ICE as the sum of its constituent elements: Human capital efficiency coefficient (HCE) and Structural capital efficiency coefficient (SCE):
ICE = HCE + SCE
What is specific here is that human capital is a key resource for generating added value in the company and is treated as an investment not an expense. The effectiveness of human capital is calculated as follows:
HCE = VA / HC
where: VA - value added; HC - Human capital, measured by the expenditure on employee wages in the company.
If the index values are below 1 the company does not create enough added value to cover its obligations to the employees. The optimal levels of HCE have values above 2,5, which is testimony to a highly efficient organization. They are usually observed in the high-tech industries.
The second component of intellectual capital - Structural capital efficiency coefficient (SCE), is calculated by the formula:
SCE = SC / VA
where: SC - Structural capital; VA - Value added
Structural capital is calculated as the difference between Value added in the company and Human capital measured by the expenditures on employee wages in the company.
Since intellectual capital operates in conjunction with physical and financial capital, their role can not be ignored. Therefore, in order to obtain complete information on the effective use of company resources the Capital employed efficiency coefficient (CEE) must be taken into account:
CEE = VA / CE
where: VA - value added; CE - Capital employed
CONCLUSION
The coefficient VAICTM can be considered as a first step in defining the involvement of intellectual and, in particular human, capital in the value creation in the company. The measure is of mainly diagnostic nature, which requires its use with other systems and models for assessing the intellectual capital of the company. The potential use of VAICTM is associated with its integration in the Balanced scorecard (BSC), as well as its joint use with Tobin's Q ratio and Economic Value Added (EVA ™). Our further studies of the public companies in Bulgaria will be oriented in this
221
direction, especially because our country occupies one of the last places as regards LLL1.
References
1. Ballow J., Burgman R., Roos G., Molnar R. A New Paradigm for Managing Shareholder Value. 2004
2. Bradley, K., Albert, S, Intellectual Capital as the Foundation for New Conditions relating to Organizations and Management Practices, Working Paper Series No. 15, Milton Keynes, Open University Business School, 1996
3. Drucker. P. California management review, 1999, vol. 41, No.2
4. Kaplan. R., Norton, D., Measuring the strategic readiness of intangible assets, Harvard business review February, 2004, p. 52-63
5. Measurment and management of intellectual capital, IFAC, 1998
Power of Innovation. Intellectual Capital, Supplement to Skandia's 1996 Interim
Report.
6. http://www.skandia.com/en/includes/documentlinks/annualreport1996/e9606Power. pdf; Edvinsson, L., G. BrQnig, Aktiv Posten Wissens Kapital, Gabler
7. Pulic, A. - Intellectual capital - does it create or destroy value?, Journal of Business Performance Management, vol.8, No.1, 2004
8. Stewart, T.A, "Brainpower", Fortune, June 3,1991, p. 42-60
Баффет,У., Эссе об инвестициях, корпоративных финансах и управлении компаниями, Альпина Бизнес Букс, Москва, 2005
9. Georgieva, T., intellectual capital of the company. -http://im2.hit.bg/Text/Resources/8-13.pdf
10. Мильнер Б. З. Управление знаниями. М. ИНФРА-М, 2003, с.
11. Солдатова Е.В. Интеллектуальный капитал как стратегический фактор
стоимости коммерческого банка -
http://uecs.mcnip.ru/modules.php?name=News&file=article&sid=65
1 According to statistics data, in 2005 in the EU 10.2% of people aged between 25 and 64 years participated in training programs, while in Bulgaria they were only 1.3%.
222
