If a company's most important assets are indeed its people, as corporate executives parrot endlessly, that's news to investors, analysts, and even, as it turns out, many companies.
It is hardly a secret that the industrial economy that prevailed for two centuries has evolved into a talent-driven, knowledge-based economy. Still, extant accounting standards define "assets" mostly in terms of cash, receivables, and hard goods like property, equipment, and inventory, even though the value of many companies lies chiefly in the experience and efforts of their employees.
Public companies are required to disclose virtually nothing about their human capital other than the compensation packages of top executives, and most are happy to report only that. The furthest most companies will go in reporting on human capital within their public filings is to mention "key-man" risks and executive succession plans.
More than two decades ago, Jac Fitz-enz and Wayne Cascio separately pioneered the idea that metrics could shine a light on human-capital value. From their work grew the notion that formal reporting of such metrics could add value to financial statements. That discussion simmered quietly for many years, but recently it has grown more bubbly, as some of the best minds in human-capital management and workforce analytics work hard to influence the acceptance of such reporting.
Some are crafting detailed structures for what they generally refer to as human-capital financial statements or reports, which would complement (but not replace) traditional financial reporting. Their goal is to quantify a company's financial results as a return on people-related expenditures, and express a company's value as a measure of employee productivity.
To be sure, finance and human-resources executives alike have long considered many important aspects of human-capital value to be unquantifiable. That's why an effort by the Society for Human Resource Management, less-granular than some similar efforts but very well organized, shows promise to have a sizable impact. SHRM's Investor Metrics Workgroup, in conjunction with American National Standards Institute (ANSI), is developing recommendations for broad standards on human-capital reporting. The group plans to release its recommendations for public comment early in 2012. Should ANSI certify the standards, the next phase would be a marketing campaign aimed at investor groups and analysts, encouraging them to demand that companies provide the information.
If demand for that data were to reach a critical mass, then presumably accounting-standards setters would eventually look at adopting some type of human-capital reporting, and the Securities and Exchange Commission and other regulators would subsequently get involved. Of course, that's a grand vision, and even its most optimistic proponents admit that it will take at least a decade, and probably twice that long, to fully materialize.
But the SHRM group's chair, Laurie Bassi, is confident that the effort will succeed, however long it may take. "It's going to serve as a catalyst for change," says Bassi, a labor economist and human-capital-management consultant. "When investors start to demand this information, it's going to be a wake-up call for many, many companies. For some well-managed, well-run firms it won't be a stretch, but others will be hard-pressed to produce the information in a meaningful way."
Bassi says that the driving forces behind the effort boil down to two things: "supply and demand, or, you might say, opportunity and necessity."
On the supply/opportunity side, advancing technology and lower computing costs have greatly eased the collection and crunching of people-related data, enabling companies to get their arms around what's going on with their human capital in a much more analytic, metrics-driven way than was possible a few years ago. The demand/necessity side is that, driven by macroeconomic forces, human-capital management is emerging as a core competency for employers, particularly those in high-wage, developed nations.
Something for (Almost) Everyone
Investors and analysts aren't demanding human-capital reporting yet, but they might not need much prodding. Upon hearing for the first time about SHRM's project, Matt Orsagh, director of capital-markets policy for the CFA Institute, says that "it sounds fabulous. I want all the transparency and inputs I can have. Quantifying the worth of human capital would be fantastic, because right now you have to take it on faith, and I don't know if I can trust it."
Predictably, some CFOs are less enthusiastic. "It's a fair point that the balance sheet doesn't recognize the value of human capital, and certainly not the full value of your intellectual property," says John Leahy, finance chief at iRobot, a publicly traded, $400 million firm. "For a high-growth technology company like ours, there is significant intrinsic value in the know-how and innovation of our people, which is why we've traded over the last couple of years at a fairly attractive multiple.
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