by Issues in Human Capital Measurement
The Reality: People are Critical to Business Performance
Most business managers understand that the capabilities of their employees are the difference between “make or break” results. They are keenly aware that capable people position their company to compete with current competition while simultaneously creating the ability to go after new markets and innovative new products and services. They make an organization strong, agile and flexible, which gives a chief executive option. When the future is uncertain, options are what a chief executive needs most of all.
The Fantasy: Assets Can Be “Cost Reduced”
When these same executives sit down with “the numbers,” people look like a huge cost, which makes them a target for cost reductions. It is hard to know what exactly this cost consideration includes. Consider salaries, benefits, training, relocation, HR department and information technology expenses, plus the time managers spend in hiring, performance appraisals, disciplinary actions and employee development. Few companies actually know their total investment or the percentage these investments represent in their total operating expense. More importantly, what is the company getting for all that money? When this question can’t be answered, cost reductions are sure to follow. Yet if people are an asset, these costs are actually investments. Investments are made with the expectation of a return, which implies that the asset must have value. A “cost reduction” of an asset is called decapitalization. Companies that “downsize” may be decapitalizing and not even realize it.
Human Capital: The Real but Intangible Asset
Finance will tell us that people cannot be an asset. They are not owned or controlled by a company. This is true. However, people are the owners of their own human capital; the knowledge, skills, talent and enthusiasm that they invest in various aspects of their lives. Some of their human capital will be invested in their work. Therefore, the collective human capital investment people make in a company is an asset that meets all the criteria of an intangible asset a part of a company’s productive capability.
Managing by the Numbers
The “numbers” of financial accounting do not tell a business manager much about the investment or the value of human capital. These numbers can create serious distortions when making human capital investment decisions, causing managers to destroy shareholder value in the process of making the “numbers” look good. Managing “by the numbers” requires relevant measures. Most business managers know net income, revenues and earnings per share off the tops of their heads; they can recite return on equity and assets. Do they know the return on investment in human capital? Not likely. This is where ProOrbis’ expertise in human capital asset management and paradigm shifting methodology can transform the way large organizations view and value their human capital assets, leading to bigger and better returns on their investment and a more productive, sustainable organization.
Reporting
Human capital reports provides qualitative information on the employees, HR practices, trends in the company etc which can help the business grow. It covers aspects like organization structure, employee data, expertise & skills of the employees, salaries, policies etc. Human Capital Reporting is reporting of valuation of human resource inside company, which usually consists intangible values.
People inside organizations are becoming source of competitive advantage. As key talent become strategic advantage, human capital reporting is the way forward. Many companies have attempted to put valuation of human capital on their balance sheet. There is no framework to perform valuation of human capital. In such case, companies attempted their own methods for reporting in financial statements. This subjectivity creates lot of issues in the absence of no prescribe accounting standards.
Issues with Human Capital Reporting
- No mechanism to verify correct valuation in terms of accounting
We know that all the financial reports published by the companies are audited. Financial Audit ensures correct accounting practices are followed and brings out any fraudulent activities in accounting. For HCR, there is no such audit. Hence HCR not subjected to verification.
- Companies which initiated HCR as the good practice found themselves in financial trouble
Companies who reported their human capital could not maintain their own financial health. Because of this, HCR could not gain required attention to be followed as standard practice. HCR lost its value with sceptics of being used for accounting frauds. Human capital reporting needs to evolve through these issue to be best practice which would be aimed at highlighting the greater goal of potential of human resource the company has.
