Intellectual Capital

“The owners of the tools of production determine economic structure”. (Marx, 1912)
From the mid-nineteenth century to some time in the early twentieth century the tools of production were buildings, machines, and materials; and what it required to own them, was money. Therefore those who had the money, the capitalists, wielded the power in industry.
By the mid-1930s business had become much more sophisticated and money had become more accessible. With modern banking and the availability of venture capital, one didn’t need to own the money in order to be able to use it. Because of the increasing sophistication and complexity of businesses, highly expert managers were needed to run them successfully. The tools of production became management skill, and the managers wielded the power. There is a considerable amount of literature on the separation of management and ownership, and the conflict generated by the transition of power from shareholder to executive. (Burnham, 1941; Berle & Means, 1932; Jacobs, 1991; Belasco & Stayer, 1994)
In the late twentieth century it appears that yet another shift is taking place. Businesses are being reengineered, management structures are being flattened, and workers are being empowered. The new emphasis is on knowledge workers. The new tools of production are specialist skills and knowledge - intellectual capital.
“The principle tools of production today are not machinery and equipment, but the ideas and talents of the people. Today, the intellectual capital of the scientist, the machinist, and the programmer is the critical resource, so the possessors of the intellectual tools of production - people - will come to exercise effective power.” (Belasco & Stayer, 1994)
Charles Handy advises:
“In the age of intellectual capital, we need to rethink the constitution of our corporations to give a proper voice to those who really own that capital - the core workers.” (Rapoport, 1994)
Although Marx might not recognise the form he would be satisfied with the result: the tools of production are finally in the hands of the (knowledge) workers.
During the periods when capitalists and managers owned the tools of production, the economic structures determined by them were well documented in a wealth of theory, frameworks and systems. These date as far back as the fifteenth century when Friar Lucas de Borga of Venice published his treatise, which recorded the concept of double-entry bookkeeping, which some believe was already in use by the Romans and Greeks.
In the last century, Weber’s observations on the German Army, and Fayol’s experience of running French coal mines resulted in the command and control theories of management still popular in many businesses today. (Weber, 1947; Fayol, 1931; Belasco & Stayer, 1994) Over the last century thousands of books have been written, business schools have been set up, graduate degree courses have been created, to develop and propagate the theories, frameworks and systems of management and administration based on the needs of the ‘money capital’ and ‘management skill capital’ eras.
In the coming epoch of intellectual capital some of these theories, frameworks and systems are becoming inadequate.
Edmund Jenkins who chairs a task force for the American Institute of Certified Public Accountants says: “The components of cost in a product today are largely R& D, intellectual assets, and services. The old accounting system, which tells us the cost of material and labor, isn’t applicable.” (Stewart, 1994)
Of grave concern to accountants is the “difficulty of measuring and managing the chief ingredient of the new economy: intellectual capital, the intangible assets of skill, knowledge, and information. Accounting for intellectual capital is more than an exercise for the cloistered or the fad-struck. What’s at stake is nothing less than learning how to operate and evaluate a business when knowledge is its chief resource and result.” (Stewart, 1994)
“People should be counted as an asset, not a cost. Their knowledge and competence are the main sources of wealth-generating capacity today.” (Dodds, 1993)
Charles Handy estimates that the intellectual assets of an enterprise are usually worth three to four times tangible book value. (Stewart, 1994)
Pioneer companies are starting to try and measure intellectual capital in order to account for it. However accounting is only one aspect of the business. The modern enterprise needs to do more than merely reflect intellectual capital on the balance sheet, it must develop structures and frameworks, strategies and procedures for capitalising on it. The structures and frameworks offered by Enterprise Architecture qualify as high calibre ordinance in the arsenal of any large, complex enterprise which aims to survive the battles of twenty-first century commerce.
In 1991 Skandia Assurance & Financial Services (1993 premium income $2.2 billion), appointed Lief Edvinsson as the corporate world’s first director of intellectual capital. Edvinsson, who believes that the value of intellectual assets exceeds by many times the value of assets that appear on the balance sheet, identifies two kinds of intellectual capital, human and structural. Human intellectual capital is important as the source of innovation and renewal, but is useless if it cannot be exploited. Exploiting it requires structural intellectual assets, such as software applications, manuals, and other structured know-how - those things which turn individual know-how into the property of a group. Edvinsson believes that for managers and shareholders, structural capital counts most; it remains the property of the enterprise, it puts new ideas to work, it amplifies the value of human capital, and it can be used again and again to create value. (Stewart, 1994)
Enterprise Architecture can be a particularly powerful tool in capturing and capitalising on structural intellectual assets.
The process of accumulating intellectual assets is often referred to as organisational learning .