Intellectual Capital in Companies Explained for Dummies

What is intellectual capital?

Intellectual capital refers to the value of a company’s collective skills, knowledge, experience, economic processes, organisational processes, informational resources, and intangible assets such as patents, copyright, licence agreements, and knowledge systems, allowing the company some form of economic advantage over other competitors.  

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Other types of capital that are part of a company’s capital

Besides intellectual capital, a company’s capital can also include, among others, the following types of capital: Financial capital, also called economic capital, comprising:

• equity capital, also referred to as share capital or residual capital, provided by shareholders of a company via share purchases,
• debt capital, obtained from banks and other financial institutions by means of loans, and
• working capital, also known as net working capital (NWC), generated by a company through its daily operations.

  Natural capital, referring to natural assets or resources (renewable and non-renewable) that are available to a company to generate revenue, contributing to the value of the business.   Social capital refers to the ability of a company’s employees and management to work together to adhere to the values of the company, effectively achieving the company’s goals.  

Types of intellectual capital

Intellectual capital can be classified into three main categories, namely human capital, relationship capital, and structural capital. Human capital Human capital of a company refers to how competent, well-equipped, and skilled the employees of a company are, able to contribute to the intellectual capital and progress of the company. The following aspects contribute to the quality of a company’s human capital, improving productivity and increasing the value of the company:

• Education
• Employee training
• Knowledge
• Experience (life and work)
• Expertise
• Flexibility
• Creativity
• Communication skills
• Employee satisfaction
• Competencies
• The company’s relationship with and supervising of employees
• Intelligence, as well as emotional intelligence
• Employee loyalty
• Health
• Problem-solving
• Technical qualifications
• Mental and emotional well-being

A low employee turnover rate (the percentage of employees who leave a company or organisation during a certain timeframe) is an indication of high human capital. Typically, a satisfactory employee turnover ratio is about 10%.   Relationship capital Relationship capital also called relational capital, comprises all the interactions of a company with its:

• employees,
• suppliers,
• investors (shareholders),
• service providers, and
• customers.

It is a type of capital that encompasses, among other aspects, the following:

• relationships (formal and informal),
• partnerships,
• alliances,
• social networks,
• joint ventures,
• distribution agreements,
• trust,
• customer engagement and loyalty, and
• corporate reputation.

It is important for a company to get feedback regarding all these relationships in order to improve and develop its relationships, eventually enhancing the company’s intellectual capital. Positive relationships with suppliers, and satisfied and loyal customers, contribute to the strength of a company’s intellectual capital.   Structural capital Structural capital is about the fundamental aspects of a company that is central to its existence and values.   Examples of these fundamental aspects are: Organisation processes such as:

• formal processes,
• management processes, and
• databases.

  Organisational culture, comprising, inter alia, the following aspects:

• vision statement,
• mission statement,
• corporate values,
• management philosophy,
• company policies, and
• work culture.

  Intellectual property, encompassing items such as:

• data and information,
• patents,
• copyrights,
• brand names,
• knowledge (formal, codified, and tacit), and
• licenses.

Intellectual property enables a company to build and strengthen its brand name, increasing its market value. However, protecting intellectual property rights can be quite expensive. Costs associated with the protection of intellectual property are, among others, court expenses, registration fees, filing fees, settlement fees, and lawyer fees.  

Can intellectual capital be measured?

Although difficult to measure, intellectual can be measured. In fact, there are various methods available to measure intellectual capital. However, there is no uniform or consistent method of measurement that is widely used in the business world. In general, intellectual capital is viewed as a type of asset but not all the types of intellectual capital are reported on a company’s balance sheet. Although the total economic value of a company’s human, relational, and structural capital may not reflect on its balance sheet, some aspects of intellectual property, such as licenses, copyrights, or patents, may be reported as intangible assets on its balance sheet.

Some methods available to measure intellectual capital

Market value-to-book value ratio (MV/BV) The market value-to-book value ratio (MV/BV) indicates how much a company’s total value exceeds its financial value. However, the MV/BV ratio may not always be an accurate indicator of a company’s intellectual capital because of the influence of several external factors.   The Skandia navigator Skandia, a Danish company, designed a collection of methods to measure intangible assets. The Skandia navigator covers broadly five components, namely:

• customer process,
• financial,
• development,
• renewal, and
• human.

  The balanced scorecard method The balanced scorecard method is a metric that measures four aspects of an employee as part of the organisational performance of a company. The four aspects are financial, customer, internal processes, and organisation capacity, also referred to as growth perspective.  

The importance of intellectual capital

• Intellectual capital plays a vital role to create value for a company from the synergy of tangible and intangible assets, enhancing the performance of a company.
• In addition, intellectual capital improves the reputation of a company. Hence, making it important for the survival of a company.

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