Academic journal article IUP Journal of Corporate Governance

Corporate Governance and Disclosure Practices of Firms: The Impact of Nature and Types of Intellectual Capital

Academic journal article IUP Journal of Corporate Governance

Corporate Governance and Disclosure Practices of Firms: The Impact of Nature and Types of Intellectual Capital

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Corporate governance involves a diverse set of relationships between management of firm, its board, its shareholders and other stakeholders. Corporate governance provides an ethical process as well as a well-defined structure through which the objectives of the firm, the means of attaining such objectives, and systems of monitoring performance are also set. Corporate governance is about commitment to values, ethical business conduct, and transparency and makes a distinction between personal and corporate funds in the management of a firm.

In the past, the corporate value was mostly measured by the tangible assets reflected in the book value of the companies. Traditionally land, labor and capital were considered to be most valuable assets in economics. The traditional industries, as it is referred to, constitute industries that were mainly dependent on visible physical assets and hence are more capital intensive. However, there is a gradual shiftin focus from capital and labor intensive firms to knowledge intensive firms. Starbuck (1992) suggests that term 'knowledge intensive' can be applied to firms in which knowledge has more importance than other inputs (i.e., capital and labor), and human capital, as opposed to physical or financial capital, dominates. In the knowledge-based industries numerous corporate organizations have utilized intangible assets (Intellectual Capital or IC) for their competitive advantage to create corporate value.

The terms IC, intangible assets and intellectual assets are used interchangeably as they all represent a non-physical claim to future benefits. The value created by IC is often not reflected in the financial statements of these companies. IC is the prominent resource in knowledge based industries and the growing difference between book value and market value of firms could perhaps explain the role of IC. In fact, many firms rely almost completely on their intellectual assets for generating revenues. This shiftin importance has raised a question regarding corporate governance and disclosure practices of IC intensive (knowledge) firms to know whether they have better corporate governance and disclosure practices compared to capital intensive (traditional) firms.

In the current Indian business environment, there is not much research on the influence of nature of industry such as traditional firms versus IC intensive firms on the corporate governance and disclosure practices. Hence, this research aims to contribute to the understanding of this relationship. This study focuses on corporate governance and disclosure practices of sample firms selected from IC intensive firms listed in Bombay Stock Exchange (BSE). IC intensive sectors representing firms from healthcare (pharmaceuticals), IT (Information Technology) and Fast Moving Consumer Goods (FMCG) were selected for this study. These sectors are characterized by large investment in intangible or knowledge assets with relatively small proportion of tangible assets. By analyzing the impact of nature of industry (i.e., IC intensive firms) and types of IC on corporate governance and disclosure practices, this research identifies and tests the empirical evidence for such relationship.

Literature Review

Corporate governance stands for responsible business management geared towards long-term value creation. Good corporate governance is a key driver of sustainable corporate growth and long-term competitive advantage (Madhani, 2007a). Disclosure is an important component of corporate governance since it allows all stakeholders of firms to monitor performance of the firm. Disclosure by firms can be categorized as mandatory disclosure and voluntary disclosure. Voluntary disclosure, also defined as information in excess of mandatory disclosure, has been receiving an increasing amount of attention from researchers in recent corporate governance and disclosure studies. …

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