Building an intellectual capital disclosure index: an empirical research in Portuguese Banks

The relevance of intangibles for financial institutions is getting more widely accepted. Several studies demonstrate that the impact of intellectual capital disclosures provides useful information to assist actual and potential investors in making rational decisions. However, contradictory findings indicate that while capital markets need information on intellectual capital, the actors of the same market refuse this fact. Banks are knowledge-intensive organizations where information and knowledge are recognized as a source of competitive advantage and the essential foundation for future success. Intellectual capital is defined as a pack of intangibles, typically displayed in the form of skilled people, processes, competencies and knowledge, which have the ability to create value, and which are not included in the traditional financial reporting models. The existing intellectual capital literature in the context of banking sector is limited and particularly in respect of intellectual capital reporting and disclosure. Thus, the present study seeks to add knowledge to the intellectual capital literature in the course of providing further empirical evidence on intellectual capital disclosure practices along with 32 banks operating in Portugal. The objectives of the study are twofold. Initially, this work is an attempt to assess the extent to which Portuguese Banks’ voluntarily report components of intellectual capital in the annual report. Second, the research captures banks websites’ of such disclosures. Specially, in the paper we address the answers to the following questions: 1) What is the extent of intellectual capital disclosure in annual reports of Portuguese banks? and 2) Which components of intellectual capital are frequently being reported in the banks’ websites? Based on two European models - the Intellectus and InCaS - we built a disclosure index. Results show higher level of intellectual capital disclosure in annual reports when compared with the information provided in websites. With regard to the components of intellectual capital, the disclosure of human capital and structural capital is higher in the Portuguese banks’ annual reports than in webpages and, conversely, the disclosure of relational capital is higher in the webpages. Despite several limitations, we believe that the study has both theoretical and practical implications. From a theoretical standpoint, an index of intellectual capital disclosure is built extending our understanding of the intellectual capital phenomenon in the banking context. From a practical point of view the research may be of relevance for banking managers and regulators. For banking managers because it offers an opportunity to gain an impression of their banks’ future potential for growth. For regulators, the relevance of the study focuses on their understanding of developing mandatory reporting or additional policy requirements. We then argue that this study provides a motivation for further research that contributes to a body of knowledge and practices in the intellectual capital disclosure