2011-47
Exploring to Acquire the Legitimacy Management andDisclosure of Intellectual Capital Information Practice
Tadanori Yosano

Exploring to Acquire the Legitimacy Management and Disclosure of Intellectual
Capital Information Practice

Tadanori Yosano, Graduate School of Business Administration, Kobe University

Abstract
This paper provides an analytical viewpoint that includes two perspectives that
expand the MERITUM guideline in order to acquire intellectual asset management
legitimacy and disclosures.

This will help spread intellectual asset management

practices and disclosures. First, this paper proposes that there is a reflexive dynamism
between the company's organizations and “boundary network organizations by sharing
resources with boundary network organizations using the company's internal resources.
In other words, we discuss a reflexive dynamism consequential from the interaction
between the company's organizations and the boundary network organizations including
both stock affiliated companies and loose businesses. Second, this paper places a greatamount of importance on the viewpoint that corporate managers mobilize thecompany’s “current” resources into their corporate strategies. The companies need the“current” resources vector to adequately coincide with corporate strategies which
include both “current” and “future” business area selections. This paper discusses how
the Intellectual Capital Report will be able to acquire legitimacy within our society fromthese two perspectives.

11. Introduction

It has been almost a decade since the start of focusing on intellectual property as adriving force for economic revitalization in Japan. Koizumi Cabinet established the“Strategic Council on Intellectual Property” in March 2002, and issued the “Intellectual
Property Policy Outline” in July 2002. It proposed promoting policies aimed at using
intellectual property to create “a nation built on intellectual property.” In line with thispolicy, the Ministry of Economy, Trade and Industry (METI) in Japan published the“Guideline for Disclosure of Intellectual Properties” to emphasize R&D and patents inJanuary 2004. In this guideline, companies are recommended to recognize theimportance of corporate intellectual property, formulate an intellectual property strategy
that cooperates with their business and R&D strategy, and disclose an “Intellectual
Property Report” to enhance the understanding of market participants about the
management of intellectual property. In October 2005, METI issued “Guidelines forDisclosure of Intellectual Assets Based Management” that covers all types of industries.
This guideline encourages companies to understand the importance of the originality ofmanagement that utilizes intellectual assets, such as human resources, technology,
organizational strength, customer networking, and branding, etc. The guideline needs amanagement based on intellectual assets in collaboration with the management
philosophy, the business strategy, and the disclosure of the “Intellectual Capital Report”
to translate intellectual asset based management practices to stakeholders surrounding
the companies1.
“Guidelines for Intellectual Properties” and “Guidelines for Disclosure of Intellectual
Assets Based Management,” issued by METI, are based on Denmark guidelines(DMTI, 2000; DMSTI, 2003; A Guideline for Intellectual Capital Statements) and
MERITUM guideline (MERITUM, 2000; MEasuRing Intangibles To Understand andimprove innovation Management) whose central economies are in Northern Europe.
However, these disclosure practices have not acquired social legitimacy necessary to
spread reports with intellectual asset based managements, and is only a partial practicein Japan. In a situation where legitimacy has been established, a person’s actions are
1

Details for the Japanese movement on intellectual assets based management can be found in the
METI’s web site: http://www.meti.go.jp/policy/intellectual_assets/english.html.
2

evaluated as “appropriate” or “adequate” according to the norms, values, and beliefs
that are built in society (Suchman, 1995). In addition, Meyer and Rowan (1977) referredto this situation as having a secure legitimacy, given that the values, norms, and beliefs
are practiced daily.
This paper provides an analytical viewpoint that includes two perspectives that
expand the MERITUM guideline in order to acquire intellectual asset management
legitimacy and disclosures.

This will help spread intellectual asset management

practices and disclosures. First, this paper proposes that there is a reflexive2 dynamism
between the company's organizations and “boundary network organizations 3 ” bysharing resources with boundary network organizations using the company's internal
resources. In other words, we discuss a reflexive dynamism consequential from theinteraction between the company's organizations and the boundary networkorganizations including both stock affiliated companies and loose businesses. Second,
this paper places a great amount of importance on the viewpoint that corporate
managers mobilize the company’s “current” resources into their corporate strategies.
The companies need the “current” resources vector to adequately coincide withcorporate strategies which include both “current” and “future” business area selections.
This paper discusses how the Intellectual Capital Report will be able to acquire
legitimacy within our society from these two perspectives.
The structure of this paper is the following: Section I discusses the propositions of
the “current” internal resources that have been accumulated over “past” investments.
Section II discusses the propositions of network organizations that surround thecorporate organization, and have also accumulated over “past” corporate investments.
Section III gives importance to narrative 4 explanations for the relationship between
2

Reflexivity explains the relationship between knowledge and our social life. The social knowledge
that we acquire might influence our mannerisms in society (Giddens, 2001, p. 697). In this situation,
our actions might have an influence on the socio-economic circumstances. Therefore, when
corporate organizations conduct their business, they might expand and/or shift into a new stage as aconsequence of the interactions between corporate organizations and surrounding circumstances.
3
Networks exist in the boundaries of the corporate organization. These networks involve

cooperative organizations and/or corporations, such as R&D partners, cooperative
products, and services manufacturing companies, partners for the market development
and expansion, and partners for the construction of the supply chain networks. This
paper calls these cooperative organizations “the boundary network organizations.”
4

A written tale, story, and description and/or depiction of the situation.
3

corporate strategies and intellectual capital within organizations according to theintellectual capital management perspective. Section IV gives significance to thedisclosure of intellectual capital, especially focusing on the reflexivity between
corporate organizations and socio-economic environments.

Lastly, Section V

concludes this paper’s main contributions and discusses future prospects.

2.

Accumulation of “current” corporate

internal resources

Edvinsson and Malone (1997) were the first to watch the management anddisclosure of intellectual capital, and the fruits of this movement led to measurements,
such as the Danish and MERITUM guidelines in 2002. In the MERITUM guideline(2002，pp. 10-11), intellectual capital is classified into three categories 5 : Human
Capital6, Structural Capital7, and Relational Capital8. The MERITUM guideline relates
these resources to corporate activities, and provides disclosures consistent with thecorporate value creation strategies, and purposes.
However, even though the three classifications of the intellectual capital have beenrecognized by corporate managers and stakeholders in Europe and Japan, the following
perspectives have not been understood appropriately. First, how are these three capitaltypologies relateable to corporate strategies in order for greatest efficiency for the
corporate management. Second, how is the disclosure of the relationship between thesethree capitals and the corporate strategies beneficial for the corporate management.
Therefore, this section discusses the reflexivereflexive dynamics of between resources
by separating shared resources between the boundary network organizations and theinternal resources.
The “current” corporate internal resources are comprised of tangible and intangible
5

Sakakibara et al. (2010) analyzed how the financial analysts, who are the key players in thefinancial markets, perceive these three capitals in the corporate evaluation.
6
Human Capital involves individual's knowledge, technologies, know-how, and abilities forinnovation. It also involves the educational and training effects.
7
Structural Capital involves the “knowledge” embedded in the corporate organizations as aconsequence of daily, ordinary businesses. It involves general use level of IT, organizational risk
management system, the internal information transfer network equipment, innovative organizational
culture, etc.
8
Relational Capital involves all resources attendant on corporate external relationships such as
customers, suppliers, and R&D partners, etc.
4

resources that are accumulated from “past” investments. Tangible resources involveland, buildings, and tools for production, such as machinery and equipments, etc.
Intangible resources result from R&D and technology investment, employee skills
development and management expertise training, and the construction of formal andinformal institutions built into the organizational structure (Figure 1). Within theinternal resources there are some that satisfy the recognition criteria and are visible inbalance-sheet.

However, resources that do not satisfy the recognition criteria, such as

human resources and organizational institutions, are representative of intangible
resources and not recognized in the balance sheet and labeled as non-financial
information by stakeholders. Currently, the measurement of non-financial information isa challenging issue not only for the disclosure to stakeholders, but also for corporate
management. Formerly, the disclosure of financial information only required tracing
primary evidence.

However, Cuganesan and Dumay (2009), for example, emphasizedthat the measurement of non-financial information needs more than tracing basic
primary evidence, and also requires the facilitation of a measurement method with anarrative explanation supporting the correlation between metrics.

Measuring non-financial information and creating supportive narrative descriptions are the basic facets
for illustrating the reflexive dynamism between internal organizations and boundary
network organizations discussed in Section II and III, and socio-economic environments
define the reflexive dynamism between organizations, such as internal organizations
and boundary network organizations.
[Figure 1 insert here]
3.

The boundary network organizations
Why we need to separate the boundary network organization shared resources fromthe internal resources?

The reason is that the structure typologies of these two

resources reflect how to decide and construct the organization mode close related tocorporate strategies. This includes either acquiring (mergers and acquisitions)corroborating organizations and/or companies with different interfaces, such as R&D
partners, cooperative products, and service manufacturing companies, or making them5

stock affiliated companies, or keeping loose business ties. In Figure 2, arrow (a)indicates a situation where the company acquires boundary network organizations andmakes them interior organizations. Arrow (b) illustrates the situation where thecompany maintains a stock affiliated or loose business relationship with boundary
network organizations.
As Williamson (the emeritus professor at U.C. Berkeley, California; NobelPrize
Winner for Economics in 2009) noted, the corporate management decision to either
acquire (mergers and acquisitions) corroborating organizations, or make them stock
affiliated companies, or keep loose business ties can be explained with the concept of“economic transaction costs.” Henceforth, the discussion surrounding transaction
manners shows that some, when used throughout the market, are not cost-efficient, andthe company will acquire other organizations when internalization of theseorganizations is both cost and time efficient. However, U.S. historian Alfred Chandler
advocates that “the organization mode follows their strategy,” and therefore, thecorporate strategies define the organizational structures 9. Since Chandler argues thatthe organizational structure is able to adjust their modes toward corporate strategies
efficiently, the construction of an organization style is closely related with the corporate
strategies.
The important focus in Chandler’s proposed scenario is either on the internalorganizations or the boundary network organizations, because these organizations do
not remain static bearing dynamic interactions between them. The corporate
organizations collaborate with other organizations in order to pursue R&D partners,
cooperative products and service, manufacturing companies, market development andexpansion partners, and supply chain network partners.

Once “trust” is createdbetween organizations after the organic corroboration is initialized (Schoorman et al.
2007) there is a relation to the next movement.

In other words, the construction of“trust” can not only create the basis of corroboration with boundary networkorganizations, but also make the shift and/or expansion of their business into new ones
9

Chandler’s theory is based on the contingency theory where organizations optimally adjust
themselves to socio-economic circumstances. On the other hand, Meyer and Rowan (1977) pointed
out that there might be a possibility that the individual organizations create their surrounding
circumstances by working on socio-economic circumstances. Satoh and Yamada (2004) brought inthese theories and combined them into a new idea: the dynamic circulation between individualorganizations and socio-economic circumstances (pp. 305-312).
6

smoother.

We need to keep in mind that the shift and/or expansion of their businessincludes the development of new technologies, the development of a new customer
market, and the broad logistical lattice construction.

The appearance of dynamic

reflexivity, produces interactions between organizations that will lead to a subsequent
new business stage and organizations will transform themselves into a new style. Figure
2 illustrates this dynamic reflexive mechanism. The mutual influence between corporate
organizations and the boundary network organizations are shown with arrows (c) and(d), and the corporation’s shift and/or expansion of business into a new stage is shownwith arrow (e).
Referring to the aforementioned penetrating vision, the selection for a dynamic
relation between the corporate organizations and the boundary network organizations(M&A versus a stock affiliated or loose corroboration) is closely related with corporate
strategies. In the next section, this paper shows the importance of the relationshipbetween the corporate organizations and strategies, especially focusing on the “future”
stipulates “current” perspective.
[Figure 2 insert here]

4.

The analysis of the influence from both corporate strategies and the “future”

probable phenomenon on the “current” corporate organizations --- The
intellectual asset based management
Why is the management decision to either acquire (mergers and acquisitions)boundary network organizations, or make them stock affiliated companies, or keeploose business ties closely related with corporate strategies?
relation

The reason for the

between the two is that the “future” performance and sustainability ofcorporations depends on the “future” phenomenon, and existing assets , such as
corporate internal resources and share resources with boundary network organizations.
For example, Foucault (1980) views the social structure as the corporate “future” thatcan be represented by the probable phenomenon expressed by the “conditional
probability” (Figure 3). He suggests that the future phenomenon can be mapped or
predicted by the probable “conditional phenomenon,” and describes social reality from7the viewpoint of structuralism.

His view would be productive given the following

factors be utilized toward one of the “future conditional events”: the “current” resources,
such as corporate human resources, the construction of formal and informal institutions
within organizations, the accumulation of R&D abilities and technologies, and thesharing resources with boundary network organizations.

The important point toconsider is the direction of this utilization vector toward corporate strategies.

If thecorporate strategies have deficiencies and/or inadequacies, then the corporation mightface default. On the other hand, if the corporate strategies, first, utilize both internal
resources and shared boundary network organization resources efficiently and, second,are creative in a widely acceptable manner for future socio-economic audiences, thenthe corporation’s outlook and prospects might be satisfactory.

Furthermore, theforecasts for the corporate organization’s growth might be at a high rate with a greatamount of sustainability.

Therefore, the management of internal resources and sharedboundary network organization resources needs to be corroborated with corporate
strategies.
[Figure 3 insert here]
This perspective makes intellectual capital seem worth managing.

It is essential

and vital task to manage corporate resources into mobilized vectors along the direction
indicated by the corporate strategies. Figure 4 illustrates the mobilization vector X of
the internal resources, and the mobilization vector Y of shared boundary networkorganization resources.

5.

The significance for why intellectual capital needs to be disclosed
Why is it necessary to disclose intellectual capital to stakeholders, in addition to the

management?

The reason is that disclosing the relationship between the corporate

strategies and their organizational resources leads to the development of a reflexive
dynamism between the corporation and the socio-economic circumstances.

The

disclosure to stakeholders can be understood as an influential exertion from thecorporation on socio-economic circumstances. The arrow (a) in figure 4 indicates that8

corporate organizations are able to change their surrounding circumstances by exerting
their own influence upon the socio-economic circumstances. In this situation, thesurrounding circumstances are not the given restraints for corporations.
We are also able to expect adequate supervision from stakeholders by disclosing
intellectual capital to them.

It can be understood as the exertion of the socio-economic

circumstances upon the organizations. The arrow (b) in figure 4 illustrates the socioeconomic circumstance influences on the boundary network organizations. The arrow(c) in figure 4 illustrates the influence of the socio-economic circumstances on
corporate organizations.

The stakeholder’s supervision is shown through the efficientworking of the disclosure indicated with arrows (b) and (c) in figure 4.

This meansthat the corporate organization and the boundary network organization will be
disciplined adequately by the socio-economic environment.

Furthermore, if the

dialogue with stakeholders through disclosure functions efficiently, then the corporate
organization and boundary network organizations will acquire new business
opportunities from the socio-economic environment.
The dynamic reflexivity between the organizations and the socio-economic
environment, is illustrated with arrows (d) and (e).

The arrow (d) indicates thereflexivity between the corporate organization and the socio-economic environment.
Arrow (e) shows the reflexivity between the boundary network organizations and thesocio-economic environment.

This reflexivity might relate the corporate businesses toa new business stage. In other words, this enables the company to expand and/or shift
towards a new business (arrow (f) in figure 4).

This dynamic reflexivity is thesignificance for why intellectual capital needs to be disclosed.

6. Concluding remarks
This paper addresses the importance of measuring intellectual capital, and exposes
the narrative explanation for the relationship between intellectual capital and corporate
strategies. Intellectual capital exists not only in the corporate organization, but also inboundary network organizations. Measuring and disclosing intellectual capital in thismanner might lead to legitimacy creation for intellectual capital reporting. We supposethat the process of the acquiring legitimacy can be achieved from three categorized
9

procedures introduced by Suchman(1995): pragmatic legitimacy, moral legitimacy, andcognitive legitimacy10 (Figure 5).
If the reflexive dynamism between the corporate organization and the boundary
network is generated with the disclosure of intellectual capital reporting, the company
will able to expand and/or shift their businesses toward a new stage and would obtain
pragmatic interests.

Additionally, once the circulation between the corporate

organization and boundary network organizations occurs and the social value of
disclosing intellectual capital reports is acknowledged, even if only intermittently, theircorporate legitimacy is a consequential effect.

Henceforth, as these disclosure

practices are matured by applying socially accepted techniques and procedures, thenlegitimacy becomes continuous. During this phase, the intellectual capital reporting
practice will have become comprehensive and expected to be daily with anunappreciated attitude accompanied with inevitability.

Lastly, this paper is expected to

be a foothold for acquiring legitimacy in the disclosure practice for intellectual capital
reports.
[2011.12.1 1064]

10

Pragmatic legitimacy is acquired temporarily or intermittently when benefits are exchanged(exchange legitimacy). Pragmatic interests are acquired not only through direct exchange, but also
through political, economic, and social interactions. If the organization incorporates its
constituents into its policy-making structures or adopts constituent performance standards as its own,
then the influence over constituents becomes continuous (influence legitimacy). The nature ofthese exchanges are dependent on if the constituents share exchangeable “merits,” or the episodic
characteristics of legitimacy, and whether the organizational policy is of good character, which is thecontinuous characteristic of legitimacy (dispositional legitimacy). Moral legitimacy reflects a
positive normative evaluation of the organization and its activities. This legitimacy is temporarily
acquired as a consequence when practical activities are regarded as socially valued (consequential
legitimacy), and becomes continuous when the organization embraces socially acceptableprocedures and/or techniques (procedural legitimacy). Legitimacy can be acquired using thecharisma of an individual organizational leader, however, as a general rule, this kind of personal
legitimacy tends to be relatively transitory and idiosyncratic (individual legitimacy). Even withouta charismatic leader, such as when entire systems of activity recur consistently over time, this type of
moral legitimacy might be classified more as structural (structural legitimacy). Cognitive
legitimacy is acquired when the chaotic social environment is arranged into coherent, understandable
accounts. In order to provide cognitive legitimacy, an account must mesh the larger belief systems
with the audience’s daily life experienced reality (DiMaggio and Powell, 1991) (comprehensibility
legitimacy). Furthermore, when constituent cognition is consistent, then legitimacy becomescontinuous (taken-for-grantedness legitimacy). When the activity has become predictable, it
naturally becomes more understandable. This nature is the plausibility, and if the activity becomes
inevitable then it have a taken-for-grantedness nature. This nature is permanence (Sachman, 1995,
pp. 577-584).
10Reference
Chandler, A. (1962) Strategy and Structure, MIT Press, USA.
Cuganesan, S., and J. Dumay (2009) “Reflecting on the Production of Intellectual
Capital Visualisations,” Accounting Auditing & Accountability Journal, Vol.22,
No.8, pp.1161-1186.
Danish Ministry of Trade and Industry (DMTI) (2000), A Guide for Intellectual CapitalStatements.
Danish Ministry of Science, Technology and Innovation (DMSTI) (2003), Intellectual
Capital Statements: The New Guideline.
DiMaggio, P. J. and W. W. Powell (1983) “The Iron Cage Revisited: Institutional
Isomorphism and Collective Rationality in Organizational Fields*,” American
Sociological Review, Vol. 48, No. 2, pp. 147-160.
Edvinsson, L., and M. S. Malone (1997) Intellectual Capital - Realizing yourCompany’s True Value by Finding Its Hidden Roots, Harper Business, New York.
Foucault, M. (1980) Power/Knowledge: Selected Interviews and Other Writings 19721977, Gordon,C. (Ed.) Harvester Press, Brighton.
Giddens, A. (1984) The Constitution of Society, Polity Press, Cambridge, in Association
with Basil Blackwell, Oxford.
Jepperson, R. L.（1991）“Institutions, Institutional Effects, and Institutionalism,”
Powell, W. W. and P. J. DiMaggio (Edited), The New Institutionalism in
Organizational, The University of Chicago Press, pp. 143-163.
Latour, B. (1999) Pandora’s Hope, Harvard University Press, London.
Sakakibara, S., B. Hansson, T. Yosano, and H. Kozumi (2010) “Analysts’ perceptions ofintellectual capital information,” Australian Accounting Review, Vol.20, No.54,
pp.274-285.
Suchman, M. C. (1995) “Managing Legitimacy: Strategic and Institutional Approaches,”
Academy of Management Review, Vol. 20, No. 3, pp. 571-610.
MEasuRing Intangibles To Understand and improve innovation Management(MERITUM) (2002) Guidelines for Managing and Reporting on Intangibles,
Meritum.

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Meyer, J. W., and B. Rowan (1977) “Institutionalized Organizations: Formal Structure
as Myth and Ceremony,” The American Journal of Sociology, Vol.83, No.2,
pp.340-363.
Mouritsen J., H. T. Larsen and P. N. D. Bukh (2001) “Intellectual capital and the‘capable firm’: narrating, visualising and numbering for managing knowledge,”
Accounting,Organizations and Society, Vol.26, pp.735-762.
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Academy of Management Review, Vol. 20, No. 3, pp. 571-610.

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Figure 1 The typologies of the “current” corporate internal resources

The “current” resources
Tangible resources―― Land―― Buildings―― Machinery and equipments
etc, tools for production．

Intangible resources―― R&D and technology investment―― Employee skills development andmanagement expertise training―― Construction of formal and informal
institutions built into theorganizational structure
etc, accumulated in the organization．

13

Figure 2 Relationship between the internal organization and the boundary network organizations○･･･Boundary network organizations: Networks exist in theboundaries of the corporate organization. These networks
involve cooperative organizations and/or corporations,such as R&D partners, cooperative products, and services
manufacturing companies, partners for the market
development and expansion, and partners for theconstruction of the supply chain networks.

Boundary networks
(d)

(b)

(c)

(a)

Human
resources(e)The
accumulationof R&D andtechnologies
knowledge

Formal andinformalinstitutions

The company maintains a stock
affiliated or loose business
relationship with boundary
network organizations．

The company acquires
boundary networkorganizations and makes
them interior
organizations．
14

Figure 3“Future phenomenon mapped or predicted by

the probable “conditional phenomenon”

The probable phenomenon expressed by
the “conditional probability”:
We do not know which phenomenon
realize currently, however corporate
strategies decide the direction ofbusinesses toward one of the “future
conditional events.”

15

Figure 4 The dynamic reflexivity between the organizations and the socio-economic environment(a)Corporate
strategies

(e)

(d)

The corporate organizations
change their surrounding
circumstances by exerting theirown influence upon the socioeconomic circumstances．

The mobilization vector X

Reflexive dynamism

The mobilization vector Y(e)Socio-economic environment
(g)

(c)
(b)
(b)

Human
resources
Formal andinformalinstitutions(f)The
accumulation of
R&D andtechnologies
knowledge

The boundary networkorganizations

The socio-economic circumstanceinfluences on the boundary networkorganizations．

This reflexivity enables
the company to expand
and/or shift towards a
new business.

16

The socio-economic circumstanceinfluences on corporate
organizations．

Figure 5

A Typology of Legitimacy

Actions

Essences

Disposition
Episodic

Excange

Interest

Continual

Influence

Character

EpisodicConsequential

Personal

Continual

Procedural

Structural

Pragmatic
Legitimacy

Moral
Leitimacy

Comprehensibility
Episodic

Predectability

Plausibility
Cognitive
Legitimacy

Taken-for-grantedness
Continual

Inevirability

Permanence

Source） Suchman, 1995, p. 584.

17