In the late 1960s, academic bean counters tried to develop ways to put a
measurable value on human assets. It was singularly unimaginative and treated
people as just another type of bean. They compounded their sins by applying
conventional accounting principles to a subject for which they were never
designed. It failed to produce anything of any practical use so it never gained
a foothold in management thinking.
Nearly 30 years later, measuring human capital is again becoming a big issue.
There is a growing consensus among some thinkers (Leif Edvinsson et al) that
the value of human capital in an organisation is the difference between book
value and market value. While it is being passed off as ‘the latest thinking’,
you don’t have to be a genius to realise this idea holds no water.
Book values are usually an accountant’s fairy story and share prices can
vary so quickly and so dramatically for the flimsiest of reasons – an analyst
recommends ‘sell’, for example – that a human capital measure could vary
enormously on a daily basis. This hardly seems to reflect the nature of human
beings.
Based on this thinking, Ryanair currently has more human capital than BA.
While BA hasn’t always got the most out of its human capital, the relative market
values of the two businesses reveal the difference between two business
strategies.
The main flaw in most approaches to human capital assessment is that this is
not an accounting or actuarial issue. So, why use accounting technology, which
has been virtually unchanged for hundreds of years? Of course, the last people
to admit the obsolescence of their methodology are those making their living
from it. Instead, they try to shoehorn their methods to suit increasingly
inappropriate purposes.
Add to this the inclination of all propagandists to actually believe their
own hype and we start to see questionable correlations expounded, such as the
Watson Wyatt Human Capital Index. It suggests that good HR practices lead to
successful businesses.
HR professionals need to mount a serious challenge to accounting
conventions. Take a basic accounting concept such as ‘overheads’. Many employee
costs are shown as overheads simply because accountants don’t know what else to
do with them – including training investment. Worse still, ask a finance
director how they measure ‘goodwill’ and the answer is they guess.
If we in HR do genuinely believe that the way in which human capital is
acquired, developed and maximised really produces value, we had better start
developing our own methodology to demonstrate it. The metrics may involve
balance sheets and share prices but one thing is for sure – bean counters have
a very poor track record of getting the best out of people.
By Paul Kearns, Senior partner, Personnel Works
