Intellectual Capital in the Annual Reports of Arabian Banks - Research Proposal Example

Representation of Intellectual Capital in the Annual Reports of Saudi Arabian Banks Introduction In order to sustain competitive advantage and shareholder value, disclosure of Intellectual Capital (IC) in Annual Reports is increasing gaining popularity and importance. IC includes mainly tangible assets like technological aptitude, knowledge and skills of employees, relationship between management and employees – all of which contribute towards long term success and development of an organization (Li et al., 2008: 137). Fair disclosure of different forms of intellectual capital like internal structure, external structure and human capital can help the existing and potential investors estimate the valuation of a company. Facilitating transformation in the traditional structure of annual reports might prove costly, and therefore the more pragmatic approach is to encourage voluntary IC disclosure in a company’s annual reports. Based on the structural framework and objectives of a company, disclosure depends on corporate governance decision. New approach adopted in presenting the annual reports to the readers should help stakeholders make proper value assessment through the company’s intellectual capital (Li et al., 2008:137). 1.1. Problem Statement In order to meet the goal of profit maximization through enhanced performance, intellectual resources of an organization play an indispensable role. The problem faced is the paucity of IC related information in the annual reports of the four Saudi Arabian banks that have been selected for this paper. Since IC is not legally mandatory for inclusion in annual reports, this component is also considered as “unaccounted capital” (Abeysekera & Guthrie, 2005: 151). 1.2. Research objectives and question This paper will focus on intellectual capital disclosure in annual reports of Saudi Arabia firms. The necessity of IC information is steadily gaining importance from profit seeking perspective. While details about financial data and physical factors of products are easily available in annual reports of companies, there is now growing demand for disclosure of IC information (Vandemaele et al., 2005: 417). The objective of this paper is to learn how several banks in Saudi Arabia disclose intellectual capital in their annual reports. Further, this paper will explore the contribution of IC theory in the success and development of an organization. For the purpose of address the research objectives, the research question of this paper is “To what extent is intellectual capital is represented under different categories in the annual reports of Saudi Arabian banks?” The purpose is to learn how human capital is displayed in four Saudi Arabian, and the measures taken to develop human resource. 1.3. Importance of the study The significance of the research lies in the fact that it provides details of IC related information available in the annual reports of four leading banks of Saudi Arabia. Availability of literature is this specific area is rare. So the current research can fill this gap. Although few details can be found from the reports, it is nevertheless relevant for future research. The preliminary findings can guide the stakeholders of different banks and investors to assess their value and accordingly motivate them to provide more details of IC in future reports. For instance, disclosing such information in annual reports can provide significant growth opportunities. When a company experiences high efficiency in performance, they tend to display more details in annual report to garner interest of investors (Garcia-Meca & Martinez, 2007: 62). 1.4. Scope of the study This paper is a country specific (Saudi Arabia) and industry specific (banking sector) study. The focus is on human capital, i.e employees, their remuneration, and other financial and training facilities they get from their respective organizations. Moreover, this study has considered only annual reports as sources while firms may use other alternatives like individual websites, interim reports, corporate social responsibility reports, etc to disclose such information. 1.5. Research Methodology The first stage of research involves framing the research problem. Secondly, the resources to be used are identified according to the topic of interest. The chosen method comprise case study approach with the annual reports of the respective banks. The study also employs some quantitative analysis with respect to determination of some financial ratios along with the qualitative analysis of the content. For this research paper, four top ranking banks of Saudi Arabia are selected – 1) Al Rajhi Bank, 2) Bank Al-Jazira, 3) Banque Saudi Fransi, and 4) Islamic Development Bank. The paper makes a comparative analysis and comments on the extent of disclosure of the chosen Saudi Arabian banks in their annual reports. The reports of three years (2011-14) have been taken for the four banks and the hypothesis to be addressed are: H1: The extent revelation of IC depends on the profitability of the bank H2: The extent of revelation of IC depends on the efficiency of performance (determined by ratios) H3: The disclosure of IC in annual reports have shown an improvement over the years 1.6. Summary of Key Findings Intellectual capital broadly indicates the “intellectual, or knowledge-based, resources of an organisation” (Striukova et al., 2008: 298). IC is essentially a form of intangible assets. To understand more about the functioning of the company, the investors, customers and other stakeholders of a company need to be informed about intellectual resources. However “many intellectual resources are not captured within mandatory financial accounting metrics” (Striukova et al., 2008: 297). IC is generally is divided into three categories – 1) human capital, 2) internal capital, and 3) external capital (Abeysekera & Guthrie, 2004: 252). Human capital consists of the number of employees working in a firm. Internal capital is referred as organizational capital or structural capital. External capital, also referred as relational capital indicates the relationship with employees and other external parties of a firm (Beattie & Thomson, 2007: 132). For the purpose of making positive recommendation, financial analysts need to study non-financial elements like a firm’s strategies, response of customers and performance of management (Garcia-Meca & Martinez, 2007: 63). However, the most crucial challenge lies in convincing business entities about the needs of displaying IC information in their annual reports (Guthrie & Petty, 2000: 249). From the annual reports of the four selected Saudi Arabian banks, employee related information can be found. 1. Al Rajhi Bank: The 2013 annual report of this bank shows there are total of 12,542 employees including 254 employees who work in the risk taking department and 246 employees who are performing in the control department (Al Rajhi Bank Annual Report, 2013: 76). Employees receive certain benefits including air tickets. Total expense in 2013 that includes such benefits and salaries of the employees has been 15,546 thousand SR (Al Rajhi Bank Annual Report, 2013: 99). Al Rajhi Bank provides incentives in the form of bank shares to boost the morale of those selected employees who have performed with dedication. Free shares are also provided to senior employees in order to retain them. This is done so as to take advantage of their years of experience and knowledge, thus valuing them as human asset. This kind of employee benefits helps to sustain “long term functional relationships and provides suitable incentives to recognize distinguished contributions” (Al Rajhi Bank Annual Report, 2013: 25). The human resource department works towards providing employees the opportunities so that they can have constant growth and development in their career. This way a bright future can be assured to the employees. Also they are given bonus based on their performance (Al Rajhi Bank Annual Report, 2013: 34, 77). 2. Bank Al-Jazira: The 2013 annual report of this bank reveals that 629,982 thousand SR was spent on employee salaries and other related expenses. The total number of employees is 3,033 including 164 performing risk taking activities and 125 engaged in control function (Al-Jazira Bank Annual Report, 2013:.98). In order to help the employees in gaining further knowledge and to develop human capital, regular training takes place in Training Center in Riyadh. In 2013, there was 470 such training events (Al-Jazira Bank Annual Report, 2013: 35). 3. Banque Saudi Fransi: According to this bank’s 2013 annual report, the total number of employees in that year was 2,988. Also, the total valuation of employees’ salaries (which include all expenses related to the employees) is 952,546 thousand SR (Banque Saudi Fransi Annual Report, 2013: 64). The Human Resource Department focuses on helping the employees to have a balance between work and personal life, and also works towards retaining employees (Banque Saudi Fransi Annual Report, 2013: 44). 4. Islamic Development Bank: In 2013 annual report of this bank, 68,225 thousand Islamic Dinars was spent on all employee related expenses (Islamic Development Bank Annual Report 2013: 63). This bank does not provide information regarding its total number of employees, and also does not mention of any employee incentive schemes. 1.7. Frequently Used Terms 1. Intellectual Capital: This relates to the presence of soft skills, know how and ability to build and maintain positive business relationships and technological facilities in an organization. a) Internal structure: This includes the system, discipline, facilities and databases, etc, which are inbuilt possessions of an organization irrespective of the human capital b) External structure: This is termed alternatively as relational capital which covers the partnerships, supply chain and customer base. c) Human capital: In simple terms this refers to the employees who provide their intellect for the betterment of the firm. 2. Intellectual Capital Disclosure: Information provided to the customers and common people with the help of reporting. 3. Annual Report: the yearly report which contains all relevant information of a firm and this is a document where the firm can use its discretion in revealing information and upholding its repute. 4. Case studies: Undertaking study of some analysis of specific cases or institutions for the purpose of addressing the research problem. 5. Financial Ratios: Ratios computed from financial statements to determine a company’s performance and profitability related aspects. 1.8. Structure of the Thesis The thesis is divided into five main chapters. First chapter gives an introduction to the concept of IC disclosure policies of companies especially in financial sector. The second chapter comprises of a literature review focusing on determinants of IC disclosure in annual reports of different companies especially the banking sector. The third chapter is the methodology chapter which explains how the hypothesis will be addressed. The fourth chapter provides the findings of the case studies. The fifth chapter ends with some conclusions and recommendations which also imply further scope for research. References Abeysekera, I. & Guthrie, J. (2005). 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