It is becoming evident that today’s accounting methods are missing a large part of how and what creates value for a business. We’ve become obsessed with measuring the productivity of people, processes, products and customers as pieces to optimize and count on the operating statements as income and expenses. Yet most of these items are actual assets but our accounting systems do not count them as so.
As information technology created more and more opportunities for automation, a new class of productive assets arose. They include knowledge, data, processes, know-how, networks, relationships, brands and much more. Most of these “assets” never make it to the financial balance sheet and are described as “intangible.” In an intangible economy, the core assets of a company are NOT on its balance sheet. They are invisible and usually go unmeasured.
Since no one is keeping track of these new assets, there is no easy way to see whether a company is continuing to invest in its productive assets. You can’t see whether knowledge is growing. You can’t see whether the company has enough intangibles to meet current obligations and fuel future growth. You cannot see what these intangible assets are. BUT just because you cannot see them does not mean they are not there. Companies invest million in intangibles–their accounting systems simply are not capturing the value.
Economic Measures Will Change In Time…
With Wall Street’s continued demand to maximize shareholder value, the recognition that people are an asset makes a compelling business case for several reasons.
- Academic and private sector research suggest that companies that invest in their employees, and therefore create a positive environment in which they can work, perform better financially than their competitors. Stakeholders, however, deserve access to data beyond a letter from the CEO that would verify this fact.
- The number of socially responsible investors is only on the upswing, and a transparent methodology by which stakeholders can measure this metric will only win trust and additional investment in the long run.
- Wall Street’s fixation on short-term results will change as a new valuation paradigm will emerge and subsequently encourage executive behavior to invest in their employees, not drop the axe when a bad quarterly report hits the news wires.
The Digital revolution is changing how markets behave, how consumers spend, how brands engage and what the human network considers meaningful and valuable. All of these are the elements of a new economy. Sooner than later businesses and governments will wake up and recognize the need to change the way economies are measured and Human Capital will be recognized as an asset.
Then we will witness an economic revolution like we’ve never seen before.