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Why Human Capital Accounting is Becoming Imperative

“Something fundamental is afoot – and it’s structural rather than cyclical. In other words it is not a blip.” That’s according to the October 2014 issue of “Management Today.” In an article entitled “The Disappearing PLC”, it highlights the fact that, since the Wall Street high in 1997, public listings have declined 50% in the USA and UK, 23% in Europe, and 5% in Asia. So what are the implications of this?


Factors of Production 19th CenturyThink for a moment about the early days of the Industrial Revolution. In 1776 Adam Smith identified that economic and commercial growth depended on 3 factors of production: Land; Labour; and Capital. Land was still important but its usage was changing, as was the nature of labour with the shift from farm to factory. Capital, however, was crucial to drive this revolution and the particularly efficient ways of providing capital fuelled the economic growth of 19th century Europe and North America.

This continued well into the 20th century but the increasing influence of the business schools brought about a shift. Business thinking started revolving more around Plant & Equipment, People and Capital. Then slowly this also evolved. The business schools and consultants started focussing on Technology, Process and People and the terms Business Process Re-Engineering and Change Management entered the lexicon. Here you start to see the first signs of this shift away from capital.  


Factors of Production shift

Now we have reached the stage where, the article states, “The publicly quoted company essentially looks like a creature of the 20th century. Modern business is cash generative far earlier and much less capital intensive then even half a century ago. The need to mobilise outside sources of capital is so much less.”

Significantly, the factor of production that remains constant is people. That should not come as a surprise, because people are essential for business in two ways:

  • They provide the glue that pulls the other factors of production together;
  • They provide the market for the final product.

Certainly skills requirements are, once again, changing. But you still need people to create, develop and maintain both the technology and the processes. Even if we create the artificial intelligence (AI) to replace people (and there is little sign we are making the progress here that many have forecast), we still need to employ people to ensure there is a market. Without your people you have no business.

Even capitalist icon Andrew Carnegie recognised this. He said “The only irreplaceable capital an organisation possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it.”

This makes looking after your people vital. This is why employee engagement is so important. You have to find ways of inspiring, developing, and retaining your people. This is why human capital is the issue of the moment. Yes people have always been a “factor of production” but their capital nature has never been fully recognised. This cannot continue. You cannot continue to look upon your people as an expendable, easily replaceable cost. If you want your people to develop and “share their competence” you have to enable this. Treating and accounting for your employees as human capital is the vital first step. Are you ready to take it?  

Bay Jordan

Bay is the founder and director of Zealise, a company created to help larger small to large business organisations to properly value their people and thereby inspire them to optimise their self-worth and so engage them that they transform organisational performance and bottom-line results. Bay is also the author of several books, including “Lean Organisations Need FAT People” and “The 7 Deadly Toxins of Employee Engagement.”

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