Journal of Intellectual Capital

Intellectual capital management: pathways to wealth creation

Robert G. Isaac Irene M. Herremans Theresa J.B. Kline
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Intellectual
Intellectual capital management: capital
pathways to wealth creation management
Robert G. Isaac and Irene M. Herremans
Haskayne School of Business, University of Calgary, Calgary, Canada, and 81
Theresa J.B. Kline
Faculty of Psychology, University of Calgary, Calgary, Canada

Abstract
Purpose – The management of intellectual capital (IC) within organizations depends on appropriate
organizational structures and characteristics. This paper seeks to argue that certain structural,
cultural, and climate characteristics will lead to more effective IC management.
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Design/methodology/approach – The paper reviews the theoretical and empirical IC literature, as

well as the literatures regarding organic environments, trust, participative decision making, and
creative renewal processes, to develop a model relating to the antecedent conditions necessary for the
management of IC.
Findings – The model developed will assist researchers in the identification and exploration of
variables linked to the effective management of IC within organizations.
Practical implications – It is concluded that managers of organizations need to create organic
structures, build trust with employees, encourage creative renewal, and develop participative
decision-making processes.
Originality/value – By integrating several fields of the literature that relate to IC management, the
paper suggests propositions that deserve future research consideration.
Keywords Intellectual capital, Decision making, Trust, Wealth
Paper type Conceptual paper

1. Introduction
There has been little empirical research relating to the conditions necessary for the
effective management of intellectual capital (IC) within organizations. Therefore, we
know very little about internal organizational structures, systems, practices, and
characteristics that enable organizations to manage such assets. What antecedent
conditions are necessary for the harvesting of rich inventories of IC? In this paper we
explore enablers of good IC management and contribute to the IC literature by
establishing a path for researchers to follow when they investigate the management of
important IC assets. Our paper does not try to study inventory levels of IC within
organizations, but rather it examines the relationship among a number of variables
(structure, renewal, participative decision making, and trust) that might well explain
antecedent conditions necessary for the effective management of IC. Such conditions
may prove necessary for the maintenance of a competitive position among
organizations within the knowledge economy.
Journal of Intellectual Capital
Vol. 10 No. 1, 2009
This work is dedicated to the memory of the late J. Edwin Boyd, who was involved at the pp. 81-92
q Emerald Group Publishing Limited
beginning and who was a friend, mentor, teacher and colleague in his differing roles to the 1469-1930
authors. DOI 10.1108/14691930910922914
 JIC 2. Conceptual framework
10,1 Intellectual assets in many knowledge organizations are the primary source of
competitive advantage (Boulton et al., 2000; Lev, 2001; Low, 2000) and wealth creation
(Edvinsson and Malone, 1997; Stewart, 1997). IC is generally defined as the intellectual
material – knowledge, information, intellectual property, experience – that can be put
to use to create wealth (Stewart, 1997).
82 Even though labels for categories of IC differ slightly among researchers
(Kaufmann and Schneider, 2004), IC is generally classified into three dimensions that
represent human, relational, and organizational IC (Edvinsson and Malone, 1997;
Stewart, 1997). Human IC is concerned with the skills, knowledge, innovativeness,
capabilities and overall competence of employees (Edvinsson and Malone, 1997;
McGregor et al., 2004; Sullivan, 1999). Human IC represents the stock of knowledge
within an organization rather than in the minds of individual employees (Bontis et al.,
2002). Human IC interacts with both organizational and relational IC and represents the
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goods and services employees produce that bring revenues when there is an
investment of their knowledge, skills, and other abilities.
Relational IC sometimes refers to customers (Bukh, 2002; Johanson et al., 2001;
Sanchez et al., 2000; Stewart, 1997), social capital (Bueno et al., 2004), and stakeholders
(Ordó˜ez de Pablos, 2003). In essence, it represents a dimension of IC that consists of
associations with others that lead to organizational wealth (Bontis, 1999).
The organizational IC dimension is identified with technologies and supporting
systems that help employees to do their jobs and ultimately create revenues for the
organization that result in corporate wealth. Organizational IC includes databases,
technical and communication systems, policies, and other support mechanisms (Boisot,
2002; Edvinsson and Malone, 1997; Kaufmann and Schneider, 2004; Ordó˜ez de Pablos,
2003).
To allow these three dimensions of IC to flourish and prosper, management systems
must accommodate the special needs of intellectual assets. However, frequently
managers fail to recognize that organizational objectives relating to intellectual assets
can be fulfilled only with the proper foundation. To support knowledge workers,
organizations require the flexibility found in networks and organic systems and not the
inflexibility found in structures of a hierarchical nature (Elliott, 1992, p. 65).
Management systems must foster creativity and innovative practices, rather than
ensure compliance to policies and procedures. Flexible, organic environments will
ensure that the outcomes of employee creativeness circulate within the entire
organization. Systems must be established to ensure that the knowledge base of the
organization grows and is appropriate for creating wealth (Edvinsson and Malone,
1997; Stewart, 1997; Sullivan, 1999). To do so requires that managers motivate
creativity by providing opportunities for participative decision making in a trusting
and respectful context.
Given the above discussion, we develop a number of propositions in this paper
regarding the antecedent conditions – namely trust, participative decision making,
and creative renewal – necessary for effective management of IC. We theorize that an
organization’s internal organic structure is mediated by these antecedent conditions to
permit successful management of the three IC dimensions and encourage its further
development.
 In the next section, we first provide an overview of our model and its ten Intellectual
propositions. Then we discuss each of the variables and their related propositions by capital
supporting them with the extant literature. We then conclude with a discussion and
thoughts about future research. management

3. Model and propositions

Figure 1 illustrates our model. Each of its ten propositions is labelled P1, P2 and so on. 83
The model suggests that an organic structure is the foundation for ensuring creative
renewal (P1), participative decision making (P2), and trust (P3) within organizations,
the three variables that mediate the relationship between organic structure and
management of IC.
Next we examine the relationship among the mediating variables. The literature
does not provide a clear basis for determining the directional nature of the relationship
between creative renewal and participative decision making. Does participative
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decision making lead to higher levels of creative renewal activity (P4) or do creative
renewal activities encourage higher levels of participative decision making (P5)? We
also examine the relationship between trust and participative decision making and ask
the same question relating to the directional nature of this relationship. Does the
establishment of trust create conditions that allow employees to engage in participative
decision making (P6) or does participative decision making lead to the building of trust
among employees (P7)? Finally, we examine the impact of the mediating variables of
creative renewal (P8), participative decision making (P9) and trust (P10) in relation to
the management of IC within the organization.

4. Specific variables
4.1 Organic environment
Burns and Stalker (1961) suggested that organizations ought to adopt organic
structures when operating in external environments of a dynamic nature, whereas
organizations operating in stable environments should adopt mechanistic

Figure 1.
Proposed
variables/relationships
leading to IC management
and propositions for
testing (P ¼ proposition)
 JIC environments. Similarly, Shivers-Blackwell (2006) suggested that organizations should
10,1 adopt mechanistic structures in predictable and stable environments and organic
structures for less predictable and even hostile situations. Robbins (1990) described
organic structures as having low levels of formalization, diverse control, flexible task
definition, high levels of lateral communication, and expertise as influence. In contrast,
mechanistic structures emphasize formal authority levels, vertical communications
84 and bureaucratic characteristics associated with higher levels of formalization and
centralization. Given the flexibility of organic structures, they are best used when
companies must react quickly to changing external conditions. Within such structures,
decision making depends upon the possession of expertise rather than an employee’s
formal level of authority, and there are significant levels of lateral communications that
take precedence over vertical communications.
Organic environments have been viewed by scholars as incubators for the
development of organizational learning and knowledge management. Hong (1999, p.
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180) suggested, in a discussion about factors that promote organizational learning, that
“fast changing, turbulent and complex environments favor organic structure, whereas
stable environments suit the mechanistic form of structure”. Bennett and Gabriel (1999)
determined that knowledge management (KM) facilities were more extensive for
companies operating in uncertain and turbulent commercial environments. Organic
structures have also been associated with effective informational changes in relation to
the work group (Thibodeaux and Faden, 1994).
Stewart (1997) and Edvinsson and Malone (1997) included knowledge within their
definitions of IC. This provides an important link to the literature cited above that deals
with organic structures and learning organizations, KM, and other considerations. We
suggest that the effective management of IC similarly depends on the establishment of
such structures. Thus, IC is most likely to develop and become more manageable in
organizations in which the following characteristics exist:
.
experience rules over organizational status;
.
lateral communications are stressed;
.
formalization is low and flexibility is high; and
.
employees feel comfortable facing challenges in dynamic external environments.

While we believe that IC management and the establishment of an organic structural

environment is necessary, we also suggest the presence of mediating variables.

4.2 Organic environment and creative renewal

Organizational renewal depends upon employee creativity. Creativity has been defined
as “the production of novel, useful ideas or problem solutions” (Amabile et al., 2005, p.
368). Rooted in Crossan et al. (1999), Jaw and Liu (2003) suggested that self-renewal is a
cyclical process whereby organizations interact with their environments and
employees learn from the environmental responses relating to cause and effect.
Spender (2006) suggested that managers engage in creative practices to create
knowledge to cope with uncertain environments. Because organic structures are better
able to deal with the uncertainty associated with creativity, Ståhle and Hong (2002)
 found that organizational failure to meet strategic goals related to innovation is linked Intellectual
to mechanistic structures. capital
Similarly, relating IC and KM, Spender (2006) linked the suppression of creativity to
bureaucracy. Glynn (1996) has noted that mechanistic structures emphasize analytical management
rather than creative intelligence and suggests that organic structures, due to greater
flexibility and innovation, promote the latter. Scholars have linked creativity to organic
structures (Chakrabarti, 1974; Jin et al., 2007), while others talk about inhibiting 85
innovation due to the presence of bureaucracies (Bennett and Gabriel, 1999;
Kwaśniewska and Neçka, 2004). In relation to KM, Bennett and Gabriel (1999, p. 217)
argued that due to the “innovative character of knowledge generation”, organizations
must possess climates of flexibility, renewal, and variation. Regarding organizational
renewal, Ferguson-Amores et al. (2005) suggested that learning organization systems
and total quality management receive support from the characteristics of organic
structures responding to dynamic environments.
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To link organic structures further to creative renewal, we suspect that organic

structural organizations possess higher tolerance of risk taking than their mechanistic
counterparts, as a certain degree of risk taking is associated with creativity. Openness
and risk taking have been linked to change among employees (Detert et al., 2000). Lynn
(1999) suggested that risk tolerance varies with different organizations depending
upon cultural factors such as norms and values. Glynn (1996) noted that organizations
that value innovation and are tolerant of ambiguity, differing perspectives, and risk
taking will possess stronger innovation orientations. Rather than covering up mistakes
and punishing them, the quality of the organization’s knowledge can be improved
through learning from them (De Long and Fahey, 2000). Thus it would seem that
organic structures most likely have a high tolerance for taking risks and for making
mistakes in the pursuit of creative outcomes.
We therefore suggest the following proposition, as we believe it corresponds to the
literature offered above:
P1. Organizations possessing organic structural environments will engage more
frequently in creative renewal initiatives than those with mechanistic
structures.

4.3 Organic environment and participative decision making

Researchers sometimes do not distinguish between the terms “participative” and
“organic” and therefore use them interchangeably (Bowles, 1993). This implies that
within organic structures, employees participate in decision making. Thibodeaux and
Faden (1994), p. 22) suggested that “organic structures are a prerequisite for the
effective implementation of power, control, and informational changes at the work
group level”. In relation to IC, Pöyhönen and Smedlund (2004, p. 354) stated that “a
network whose aim is to transfer knowledge between its members and thus support
their continuous incremental development is most successful when adhering to an
organic mode, which emphasizes participation, tacit knowledge sharing, dialogue, and
mutual adjustments”. Participative decision making and organic structures have been
directly or indirectly linked by other scholars (Appelbaum, 1975; Chakrabarti, 1974;
Hoogervorst et al., 2004; Horwitz et al., 2003; Jin et al., 2007). We believe that an organic
environment could encourage participative decision making and that participative
 JIC decision making could in turn become a mediating variable that supports IC
10,1 management. We therefore suggest the following proposition:
P2. Organizations possessing organic structural environments will encourage
greater participative decision making than those with mechanistic structures.

86 4.4 Organic environment and trust

In an empirical study employing factor analysis and concerning managerial ethics and
perceived organizational values for information technology professionals, Jin et al.
(2007) noted that “trusting” loads on an organic structural environment rather than one
that is mechanistic. Further, McEvily et al. (2003, p. 100) have suggested that “trust
makes organizations more organic in the sense that members do not need to rely
exclusively on mechanistic coordination devices and impersonal rules to manage
interdependence in the face of uncertainty”. Calabrese (2006) noted that for the building
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of social capital among educational institutions, both organic structures and trust are
critical. The linking of an organic structure to the development of trust seems sensible
because trust must be present for the granting of freedom to the employees working
within an organic structure. We therefore believe that trust plays a role as a mediating
variable between an organic environment and IC management and we present the
following proposition:
P3. Organizations possessing organic structural environments will enjoy higher
levels of trust among employees than those with mechanistic structures.

4.5 Creative renewal processes and participative decision making

Nickerson and Zenger (2004, p. 630) suggested that for non-decomposable problems,
managers “must trust that a culture of widespread knowledge sharing and consensus
decision making is the organizational approach most likely to yield a valuable
solution”. Other scholars have noted the relationships between creative renewal
processes and participative decision making in regards to self-renewal and
organizational learning (Hong, 1999; Jaw and Liu, 2003; Thibodeaux and Faden,
1994), creating IC (Pöyhönen and Smedlund, 2004), innovation (Glynn, 1996; West and
Anderson, 1996), innovative learning and knowledge workers (Barton, 1993; Watkins
and Gutzwiller, 1999), organizational communications that are implicit (Hoogervorst
et al., 2004), and employee creativity with reference to the group (Taggar, 2002).
We recognize the strong relationship between participative decision making and
creative renewal processes, but we are uncertain of the directionality of this
relationship. Do creative renewal processes automatically lead to participative decision
making activities or does engaging in participative decision making result in creative
renewal processes? We suggest that at this time it is difficult to answer this question,
and thus we present two propositions:
P4. Organizations engaging in higher levels of participative decision making will
experience higher levels of creative renewal.
P5. Organizations experiencing higher levels of creative renewal will engage in
higher levels of participative decision making.
 4.6 Participative decision making and trust Intellectual
McEvily et al. (2003, p. 93) have suggested “trust makes decision making more efficient capital
by simplifying the acquisition and interpretation of information”. Thibodeaux and
Faden (1994, p. 25) have stated that “the development of trust tends to foster a more management
democratic organizational environment that is conducive to participation and shared
responsibility”. Other scholars have linked trust with decision making (Appelbaum,
1975; Ferguson-Amores et al., 2005). Likewise, we suggest that trust and participative 87
decision making are related, but we are unsure of the directionality of this relationship.
Does trust in one’s fellow employees encourage participative decision making or does
trust build as a result of participative decision making? We offer the following
propositions to examine through future research:
P6. Organizations demonstrating higher levels of trust among their employees
are more likely to engage in participative decision making.
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P7. Organizations engaging in participative decision making will demonstrate

higher levels of trust among their employees.

4.7 Creative renewal and IC

Pöyhönen and Smedlund (2004, p. 362) have stated: “in our view, intellectual capital
creation encompasses the whole spectrum of knowledge processes from replication of
existing knowledge and competencies to quantum-leap innovations”. Such innovations
could possess the potential to result in creative renewal. Subramaniam and Youndt
(2005) suggested that “overall, our findings provide strong support for the premise that
different aspects of an organization’s IC and their interrelationships selectively
influence its capabilities for incremental and radical innovations” (p. 457). Again, this
demonstrates a potential relationship between IC management and creative renewal
processes. We therefore posit the following:
P8. Organizations with higher levels of creative renewal activity will also possess
more effective IC (human, relational, organizational) management processes.

4.8 Participative decision making and IC

Pöyhönen and Smedlund (2004) have noted the importance of a network in the
production of IC whose members jointly create new knowledge. Ståhle and Hong (2002,
p.181), in a discussion relating to dynamic IC, stated that within “a networking system,
innovation as a strategic reserve implies the whole company and not just some of its
most creative individuals”. From our perspective, this suggests that members of
networks must participate in the making of decisions to produce new knowledge and
engage in innovative practice. Regarding organizational learning, Hong (1999)
suggested that empowerment is an important issue for maintaining organizational
vitality, and we suggest that one aspect of empowerment implies the right to
participate in making decisions. Further, Watkins and Gutzwiller (1999, p. 105)
suggested: “The future work environment will create and nurture a circumstance in
which intellectual capital and organizational excellence can flourish. The wave of the
future is to develop open organizations that are both participative and anticipative”.
Participative decision making and concepts such as empowerment and autonomy
have been linked to knowledge-driven companies (Bennett and Gabriel, 1999),
 JIC knowledge workers (Horwitz et al., 2003), solving ill-defined problems (Taggar, 2002),
10,1 strategies relating to organizational learning (Jaw and Liu, 2003), and renewal
(Ferguson-Amores et al., 2005). The literature clearly suggests that IC management is
dependent upon participative decision making at the level of the employees for the
creation of knowledge and innovative approaches, and therefore we set forth the
following proposition:
88 P9. Organizations with higher levels of participative decision-making activity
will also possess more effective IC (human, relational, and organizational)
management processes.

4.9 Trust and IC

While discussing organizational change, self-renewal, and dynamic IC, Ståhle and
Hong (2002) outlined the importance of trust between managers and their employees.
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Lin (2007) demonstrated that trust was a mediating variable between distributive
justice, instrumental ties, expressive ties, and the sharing of tacit knowledge. This
finding suggests that trust could be a significant variable in the management of IC
because the sharing of tacit knowledge is critical to the development of IC. Horwitz et al.
(2003, p. 27), while discussing work practices within knowledge-intensive
organizations, suggested that trust, among other factors, is significant and
concluded: “These would turn tacit knowledge within employees to explicit
knowledge, which is important in building both intellectual and social capital,
accessible by others in the organization”. Without trust of co-workers, privately held
knowledge would not be shared. Thus IC management, to a great extent, depends upon
trust. Pöyhönen and Smedlund (2004) have noted the importance of trust for sharing
knowledge within development networks, and Ferguson-Amores et al. (2005) have
suggested its significant role within the learning organization. We therefore present the
following proposition:
P10. Organizations possessing higher levels of trust among employees will also
possess more effective IC (human, relational, and organizational) management
processes.

5. Discussion
Synthesizing the research and findings proposed by others, we suggest that the ten
propositions outlined in this conceptual paper deserve investigation on an empirical
basis. In summary, we have suggested that organizations possessing organic
structural environments spawn higher levels of creative renewal, participative decision
making, and trust. Further, we suggest that participative decision making, and creative
renewal, as well as trust and participative decision making, work in tandem with one
another, although we are not sure of the directionality of the relationships in either
case. Finally, we have suggested that all three variables (creative renewal, participative
decision making, and trust) directly impact the management of IC within
organizations.
We strongly suggest that organic structures will provide the foundation necessary
for the management of IC, while also realizing that our propositions await empirical
verification. Organic structures probably provide fertile spawning grounds for the
 management of IC. Organic structures do so indirectly and through mediating Intellectual
variables relating to employees. In so doing, organic structures enable organizations to capital
maintain a competitive advantage among their peers.
We believe that organizations wishing to grow and manage their stocks of IC must management
create conditions that promote the development of an organic internal environment.
Such an environment will support IC management. Managers must concentrate on
building trust with their employees, among their employees, and among themselves. 89
They must also create conditions that support both renewal and participative
decision-making processes.

6. Further study
Future research needs to be directed at other variables and pathways not mentioned in
this paper. There may be several other variables that support the management of IC.
Employees are often told that they are responsible for the management of IC. Without
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knowing the enablers, how can such IC objectives ever be reached? We suspect that
there are variables other than the ones we intend to examine, such as communication
networks, other features of organizational cultures and climates, and organizational
citizenship activities that also deserve empirical observation with relation to the
management of IC.

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 JIC About the authors
Rob Isaac is a Senior Instructor in the Human Resources and Organizational Dynamics area of
10,1 the Haskayne School of Business. His research interests include intellectual capital,
organizational culture and structure, value congruence, leadership, motivation theory and
teamwork. Robert G. Isaac is the corresponding author and can be contacted at: rob.isaac@
haskayne.ucalgary.ca
Irene Herremans is a CMA-Alberta Faculty Fellow in the Haskayne School of Business and an
92 Adjunct Professor in Environmental Design. Her research interests include intellectual capital,
management and environmental control systems, environmental performance, international
business, and performance evaluation.
Theresa Kline is a Professor of the Department of Psychology and works in the area of
industrial and organizational psychology. Her research interests include team performance,
psychometrics, strategic decision-making, and attitude assessment.
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