January 2012
Newsletter

Genuine Assets - The Advent of Human-Capital Financial Statements

Technology has transformed our economy and the economies of many countries worldwide. Companies are getting more output from their workers by having them use more advanced technology, and they are getting greater efficiencies by using fewer people to do the required work. My sister told me recently that two years ago her company (in the energy business) employed six full-time workers to handle customer orders and customer care. That number went down to one earlier in the year. But following complaints, there are now three employees manning that function.

We have always heard that employees are the most valuable asset of a company and that value comes as a result of the experience and efforts of employees, whether in individual or team contributions. But emphasis has always been on the cost of the workers and ways to drive that cost down because of its powerful impact on the bottom line and the value of the company's equity. Stakeholders all agree that lean is best!

The physical workforce that remains in most companies today is, in itself, a collection of genuine assets, even though continuing advancements in technology will in time make many more of these workers redundant. But until then, the remaining workforce, because they have survived the cuts, are extremely valuable to the company, and attempts are being made to quantify this value for inclusion in financial statements. The best and brightest in the area of human-capital management and workforce analytics have been working to influence the acceptance of this kind of reporting, even though much of the perceived value has been considered unquantifiable by company managers. The goal of human-capital financial reporting 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 allow insight that goes beyond top executive compensation and to put financial rigor into talent management and related workforce issues.

Whether human capital reporting of this nature ever becomes a requirement by regulatory authorities, and best estimates give it one to two decades, companies need to recognize the benefits of an efficient workforce and the value of that workforce as a genuine asset in gaining a competitive advantage.

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Colleen Stratton

CGS Business Financial Services

Reference
Power from the People by David McCann; November 2011 publication of CFO Magazine.