Procedia - Social and Behavioral Sciences 150 ( 2014 ) Strategical financial indicators concerning the interests of the workers

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1 Available online at ScienceDirect Procedia - Social and Behavioral Sciences 150 ( 2014 ) th International Strategic Management Conference Strategical financial indicators concerning the interests of the workers Gareev Bulat Rafaelevich Kazan Federal University, Kazan, , Russia Abstract In present investigation we are aimed to study closely the subject of the personnel s dominating participation in the operation of business: to analyze the business concerns of the given group partakers, to determine the forms of calculations of relevant financial result and capital values and to compile an algorithm of strategical value-based indicators calculations The Published Authors. by Published Elsevier by Ltd. Elsevier Selection Ltd. and/or This is peer-review an open access under article responsibility under the CC of BY-NC-ND the 10 th International license Strategic ( Management Conference Peer-review under responsibility of the International Strategic Management Conference. Keywords: Financial controlling, Forms of dominating interests, Relevant indicators calculation, Financial result, Costs of capital, Economic profit, Value based management, Intellectual capital, Market effectiveness. 1. Introduction Modern concept of financial accounting and financial statement is based on the supposition that the principal users of financial information are creditors and proprietors of the capital being invested in the enterprise. Accordingly, the provision of users with reliable information about the paying capacity and shareholders profit of the enterprise is considered as a fundamental intention of financial accounting and financial figures. However in the theory of management except for creditors and proprietors the following groups are customary singled out as well: suppliers, buyers, workers and state. Each of the aforesaid groups has its own economic concerns and respectively, is interested in gaining individual financial figures and accounting data indicating the results of their contribution to the economic procedure of the enterprise. It defines the specifics of forming the financial information units in the system of management accounting and financial controlling, especially in cases when dominating participation in running the enterprise and ensuring its well-being is inherent for some particular group of contenders. In present investigation we are aimed to study closely the subject of the personnel s dominating participation in the operation of business: to analyze the business concerns of the given group partakers, to determine the forms of calculations of relevant financial result and capital values. On the basis of the said statements we suppose to compile an algorithm of generalizing Corresponding author: Tel: address: b.r.gareev@mail.ru The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license ( Peer-review under responsibility of the International Strategic Management Conference. doi: /j.sbspro

2 Gareev Bulat Rafaelevich / Procedia - Social and Behavioral Sciences 150 ( 2014 ) value-based calculations compulsory for settlement of discount-analytical ensuring of financial management and controlling. 2. Direct participation of the personnel in the operation of business Dominating participation of the employees in the operation of business is a widely spread phenomenon, which is therefore overwhelmingly crucial for studies. The present form of dominating participation is characterized by two alternative: direct and mediated personnel s participation in the management of economic procedure of the enterprise. The direct participation is in turn characterized by a situation when a considerable share of the ownership for an enterprise belongs to a group of employees or even to a single worker. Most frequently the instances of the abovementioned situation may be overseen in small-scale enterprise. However the similar form may be infrequently met in middle scale and large-scale enterprises. To abandon the superflours details which do not correlate with this particular survey let s make a supposition that the owner and the director of the enterprise is one and the same person simultaneously. The fact that this entity would be interested not only in the revenue received by the enterprise, but either in all other economic goods, seems to be obvious: one s wage and other maintenance costs for the director which on the same extent happens to be a relevant income item for him. Accordingly all of the managerial decisions will be directed at the increase of these two income items of the proprietor. It follows that financial result the proprietor-worker is interested in should be formed in accordance with the following algorithm of calculation in the sphere of accounting and planning (formula 1) Result Re venue Expenditur e Income ( Total _ exp enditure Expenditur e ) (1) where Result P-W - relevant financial result for proprietor worker; Expenditure P-W - proprietor worker maintenance costs. On the basis of this indicator one may calculate cost-oriented figure of economic profit (formula 2) Economic profit Result IC WACC (2) where IC invested capital; WACC weighted average cost of capital. The rightful part to be selected as a relevant sum of invested capital is one the dominating in the field of management proprietor-worker is capable to affect proximately, i.e. to change having a purpose to receive a sort of financial result which would be relevant for him. 3. Mediated participation of employees in the operation of business. Even more widespread and that is why exceptionally meaningful for investors is a mediated participation of workers in the running of economic procedure. In order to demonstrate the significance of such participation with the purpose of financial controlling and management accounting, one should pay due attention to the following two factors, characterizing any probable economic procedure: - social nature of any economic subject and economic procedure itself. In other words any acting enterprise is an institution by which people try to achieve their individual targets; - intellectual basis of economic result which is being received from economic procedure. From the point of view of financial controlling and management methodology, the necessity of the second factor being explained crops up. One should lay stress that the deviation of actual effectiveness of a single economic procedure (a sort of economic activity) or a whole industry (reimbursement onto invested capital) from market average cost of capital is a phenomenon in the ideal model of market relations. As numerous researches on the nature of similar deviation show, an ideal market is characterized by a peculiarity that excess average industry index of invested capital s profitability (or the index of profitability of a single enterprise taken up with original economic activity) over the value of market average cost of capital leads to an additional inflow of investments into the industry (original economic activity). As a result of rivalry amplification the profitability of an industry (of original kind of

3 144 Gareev Bulat Rafaelevich / Procedia - Social and Behavioral Sciences 150 ( 2014 ) activity) reduces to the level of market average cost of capital. The apposite situation is likewise characterized by the process when relatively low (comparable to the market average cost of capital) profitability of an industry or a kind of economic activity causes an outflow of investments and respectively an increase of profitability up to market average rate. At present there are two concepts explaining an enduring maintenance of the said deviations: - the forms of market effectiveness (uneffectiveness) investigated by Kendall M.G. (1953), Fama E.F., Fisher L., Jensen M. and Roll R. (1969), Shiller, Robert J. (1999, 2001), Shleifer A. (2000) and other; - the intellectual capital concept, investigated by Itami, Hiroyuki (1987), Griliches Z. (1990), Edvinsson L., Malone M.S. (1997), Stewart T.A. (1997), Sullivan P.H. (2000) and other. Analyzing these concepts it s worth saying that the first establishers an empirical perception of the market s nature and discards any other factors of the economic value s creation, apart from the factors of the market s condition (in the traditional concept) and the investor s behavior (in the theory of behaviorism). In connection with this, the second concept, where the intellectual capital is considered as the only apparent factor of the economic value s creation, happens to be more essential from the methodological and practical point of view for targets of financial management and controlling settlement. An enterprise acts more efficiently than an market-average one, if there is this type of asset at its disposal. Intellectual capital reveals itself in managerial decisions concerning both rather large-scale operations, attributed to the purchase of an entire business and small-scale, for instance, related to the choice of lathe tool and it s operating mode, suitable for having original part cutting. Personnel, management, investors act as mediums of managerial decisions, and, consequently, of the intellectual capital too. In other words, marketing an effective managerial decision is not an ordinary procedure depending on the conventional algorithm, as for example, automatized assemblage of an automobile by conveyor, but a complicated creative process of intellectual activity, which calls for the presence of humans personal qualities, operating as factors, ensuring the effectiveness of activity. Thus the approach emphasizes the employees participation in the operation of business. Also, one has to be aware of the fact, that granting one s intellectual capital to the enterprise, the employees, as well as typical investors, are interested in receiving benefits from its application. That is why side by side with the net profit and other financial, the role of the other index financial result from intellectual capital s application in the field of discount analytical provision of financial management, increases dramatically. An algorithm for its calculation may also be issued regarding the model of economic profit s calculation. For this purpose, let s carry out an analysis of existing approaches to cost estimation of intellectual capital s value and relevant result and define the most credible of them for financial calculation. In the opinion of Griliches Z. the cost of intellectual capital is equal to the difference between the market value of a corporation, normally defined as a product of the stock price by their quantity and restoration cost of its assets corrected with the factor of acting enterprise being taken into account (Griliches Z, 1990). Let s submit an algorithm of an intellectual capital s value calculation in a formalized way: InC P Q RC (3) stock stock Where InC intellectual capital s value; P stock, Q stock price and quantity of stock respectively; RC restoration cost of assets. Edvinsson L. and Malone M.S. adhere to the similar viewpoint, defining a value of intellectual capital as a difference between the market value of a company and its assets net cost (Edvinsson L. et al., 1997). InC FMV NW (4) Where FMV market value of an enterprise; NW net assets value. The aforesaid scholars conclusions happen to be reasonable and convincing. However, is as much as the value of capital may be figured out following the forgoing way, after the end of a relevant (planning) period only, the similar algorithms of calculation are valuable concerning factorial retrospective analysis, but are hardly applicable in preventive progress calculations. Line-item assessment of intellectual capital is characterized by registration of principally new sense of information and knowledge like intangible factors:

4 Gareev Bulat Rafaelevich / Procedia - Social and Behavioral Sciences 150 ( 2014 ) n InC InC i (5) i 1 Where: InC i article i, component combined intellectual capital; n the number of articles. For example personal goodwill, skilled and collected workforce, hiring contracts, favourable labour contracts, know-how of natural persons and other similar item form intellectual capital. These objects are evaluable in accordance with many of evaluation standards. The other alternatives of line-item assessment are also possible, for example, estimation in the light of drivers of balanced score card (Kaplan R.S. et al., 1992), multiplicative factors of human and structural capital (Maddocks J et al., 2002) or other hidden values of corporation, in those elements of its resources, which couldn t be comprehended and estimated in habitual categories (Edvinsson L. et al., 1997). This circumstances is very important because it allows to pay attention to analytical value of line-item assessment s use. In other words, a method may be used in preventive line-item management of the intellectual capital s value and consequently, to have a full-fledged use in the procedures of financial management s calculations. Having defined the rational way to calculate an intellectual capital s value, we have to consider the variants of calculations for result indicators, relevant for the fact of its application. Returning to the method and preconditions of an intellectual capital s value calculation, submitted by Griliches Z. (1990), Edvinsson L. and Malone M.S. (1997), an algorithm of relevant result computation (relevant result is a result, depended on the intellectual capital s use) may be responded in the following order: Result ( IC ) ( MV MV ) 1 FCF (6) t t Where: MV t, MV t-1 is a market value of an enterprise in the beginning and at the end of relevant period respectively; FCF cash flows, withdrawn from circulation. Analyzing the said indicator, one has to draw attention to the fact, that it reflects all of the known sources of economic profit, received from the use of an intellectual advantage of the enterprise. However, both the assessment of intellectual capital itself and the calculation of a result, compiled on the basis of its preconditions, may be applied a retrospective analysis of budgets implementation. Value added, as one more variant of a result, relevant to the workers interests. A calculation for value added indicator was already suggested by Marx K. (Marx K., 1972). In compliance with K. Marx s theory, the cost comprises three fundamental items: past materialized labour, paid by the enterprise, remuneration of labour for workers, who create a new cost directly, an income of the proprietor of an enterprise. The last two elements arrange the value added (or newly created by a firm cost): VA S PI R ML (7) Where: VA value added; S salary; PI proprietor s income; R receipts; ML materialized labour. Developing the idea of value added, it s impossible not to notice, that the indicator itself is a slightly simplified model of a relevant to employees and proprietors interests result calculation. An exactness of the calculation may be perfected if all explicit costs and imputed costs for maintenance of the intellectual capital s mediums (such as costs on expensive offices keeping, holding social arrangements, franchise crediting and other evident economic goods, granted to the employees) would be included into the content of value added indicator: VA S PI LE R ML LE (8) Where: LE maintenance costs for the employees-mediums of intellectual capital. In the long run, the similar interpretation of a result will logically sort with line-item assessment of intellectual capital. The given fact is significant, is as much as it makes possible the synthesis of generalizing formula of integral economic profit s indicator, relevant to mediated participation of workers in the economic procedure management, based on two indexes (formulae 5 and 8). The submitted formula is to be introduced in the following way:

5 146 Gareev Bulat Rafaelevich / Procedia - Social and Behavioral Sciences 150 ( 2014 ) EP( InC) VA WACC InC (9) Where: EP(InC) an economic profit, relevant to mediated participation of employees in the economic procedure management. Analyzing the stated indicator of relevant economic profit, one might say, that information it represents may have the highest level of importance and may also be construed as an indicator of management for whole social community not just a particular group of users, which is interested in a long-term existence of the enterprise. Such a high level of importance either tends to be a certain drawback of the indicator it s impossible to be imputed to responsibility of any of the enterprise s departments, except of a managing body with the highest level of accountability. This implies, that in a system of discount-analytical provision of strategic financial management and controlling the said index may be admitted as an integral one, generalizing financial information about well-being and utility of a commercial organization for the common good and welfare of the people. 4. Conclusion Summing up, we have to make several conclusions, generalizing the results of the present investigation. Firstly, the employees participation in the enterprise s management may be as mediated as pronounced, but it necessarily exists in any organization. Secondly, the indicators of traditional accounting profit and total sum of capital, being invested in the enterprise don t have ample relevance concerning economic interests of employees. The calculations of financial result and capital are to be modified for the computation of economic profit, which is being created by the employees of the enterprise. Modification of these indicators is in turn predetermines the specifics of discount-analytical provision settlement of strategic financial management and controlling in a commercial organization. Thirdly, in the system of discount-analytical provision of financial management and controlling the indicator of economic profit, relevant to the employees interests, may be admitted as a generalizing financial indicator. References Beattie, V., Smith, S.J. (2013) Value creation and business models: Refocusing the intellectual capital debate, British Accounting Review, Volume 45, Issue 4, December, pp Berglof E., Perotti E. (1994) The governance structure of the Japanese Keiretsu, Journal of Financial Economics, 36, October, pp Chen, M.-C., Cheng, S.-J., Hwang, Y. (2005) An empirical investigation of the relationship between intellectual capital and firm's market value and financial performance, Journal of Intellectual Capital, 6 (2), pp Copeland T., Koller T., Murrin J. 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