What If Human Capital Was An Asset On The Balance Sheet?

by Jay Deragon on 06/17/2013

main-images-book-peoplebala As digital technology continues to play an ever increasing role in our economy how we define and measure that which creates our economic value will be transformed.

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.

  1. 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.
  2. 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.
  3. 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.

 

 

{ 2 comments }

John E. Smith June 18, 2013 at 8:53 am

Great article and thought leadership Jay!

CEOs have been telling us forever that “people are our biggest asset” if so why are they not on the Balance Sheet? Not only the individuals but how well and interconnected (Stage 4/5) these individuals are…

This value system will change shortly. Companies that are more intuned with culture and engagement are seeing better returns… there are now ways to measure these intangibles and very soon it will draw the largest premium. :D

Lisa Rusciolelli June 18, 2013 at 12:52 am

How might we measure monetary value of people? As an organizational development professional, I’ve always been troubled by the knee-jerk move to cut investment in people such as training, coaching, leadership effectiveness; or worse, downsize, in times of economic hardship. Based upon these actions, we can say that human capital is valued only in terms expense; compensation, FTEs, “non-productive” hours.

However, if we were to put a price on an individual’s head, would we be treading in taboo waters of slavery-like accounting of human assets? I am not owned by the company. My experience and learning are mine. Should my ability to innovate, my talent in design, my skill in facilitation be measured for the benefit of trading higher in a market?

Perhaps the innovation would come by listing investment in human capital in the investments section of the cash flow statement. We should see gains on measurable improvements in employee retention, return on ideas ( a new ROI), process improvement, and others, impacting our operating numbers; while accounting for training hours, “FedEx days”, and innovation camps as investment in human capital. The job of the Chief People Officer becomes ensuring that investment yields a return in retention savings, process improvement savings, internal promotion (recruitment on boarding ) savings , etc.

Weigh in, All…

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