James Chen, CMT is an expert trader, investment adviser, and global market strategist.
Updated February 16, 2021 Reviewed by Reviewed by Thomas BrockThomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
Intellectual capital is the value of a company's employee knowledge, skills, business training, or any proprietary information that may provide the company with a competitive advantage.
Intellectual capital is considered an asset, and can broadly be defined as the collection of all informational resources a company has at its disposal that can be used to drive profits, gain new customers, create new products, or otherwise improve the business. It is the sum of employee expertise, organizational processes, and other intangibles that contribute to a company's bottom line.
Some of the subsets of intellectual capital include human capital, information capital, brand awareness, and instructional capital.
Intellectual capital is a business asset, although measuring it is a very subjective task. As an asset, it is not booked on the balance sheet as "intellectual capital"; instead, to the extent possible, it is integrated into intellectual property (as part of intangibles and goodwill on the balance sheet), which in itself is difficult to measure.
Companies spend much time and resources developing management expertise and training their employees in business-specific areas to add to the "mental capacity," so to speak, of their enterprise. This capital employed to enhance intellectual capital provides a return to the company, though difficult to quantify, but something that can contribute toward many years' worth of business value.
Various methods exist to measure intellectual capital but there is no consistency or uniform standard accepted in the industry. For example, the balanced scorecard, which is an industry performance metric, measures four perspectives of an employee as part of its efforts to quantify intellectual capital. The perspectives are financial, customer, internal processes, and organization capacity.
On the other hand, the Danish company Skandia considers the transformation of human capital into structural capital as the mission of intellectual capital. The company has designed a house-like structure with financial focus as the roof, customer focus and process as the walls, human focus as the soul, and renewable and development focus as the platform to measure intellectual capital.
Because of the nebulous nature and defining features of intellectual capital, it is also referred to as intangible assets and environment.
Intellectual capital is most commonly broken down into three categories: human capital, relationship capital, and structural capital.
Human capital includes all of the knowledge and experience of employees within an organization. It consists of their education, life experiences, and work experience. It can be increased by providing training.
Relationship capital encompasses all of the relationships that an organization has, which include its employees, its suppliers, its customers, its shareholders, and so on.
Structural capital refers to the core belief system of an organization, such as its mission statement, company policies, work culture, and its organizational structure.
Examples of intellectual capital include the knowledge that a factory line worker has developed over many years, a specific way of marketing a product, a method to cut downtime on a critical research project, or a mysterious, secret formula (e.g., Coca-Cola soft drink). A company can also bolster its intellectual capital by hiring qualified individuals and process experts who contribute to its bottom line.
For example, a mechanic graduates from technical school and starts work at an automobile manufacturer. Their intellectual capital consists of the knowledge they learned at school. After one year on the job, their intellectual capital has increased by the experience they have gained through their job and the specific application of their knowledge. After two years, the mechanic is enrolled in a training program that focuses on new technology and increased efficiency. The mechanic's, and therefore the company's, intellectual capital has increased further.
As technology and process improvements become more of a differentiating factor within modern companies, intellectual capital becomes a greater factor in achieving success in a competitive marketplace.