If it looks like an asset and sounds like an asset, then it must be an asset, right? Well, if you’re an accountant, then the answer is probably a resounding “yes.” From an accounting standpoint, an asset is an economic resource that can be owned or controlled to produce value that can ultimately be converted into cash. For example, even a piece of equipment that is not owned but rather leased from its owner must be recorded as an asset in many circumstances.
But for years, those in HR balked at thinking about people in our organizations as merely “assets.” After all, these are people we’re talking about–not something owned or even controlled by an organization. Historically, the accountants agree: employees have not been recognized on a company’s financial statement as “assets” mostly because it was difficult to quantify the value of people as assets.
Yet, as former SEC chief Steven Wallman stated in a presentation to the American Institute of Certified Public Accountants (AICPA), “Intangible assets such as brand names, intellectual capital, patents, copyrights, human resources, etc. are generating an increasing amount of [a company’s] overall wealth. With certain limited exceptions, such as the purchase of a brand name, these ‘soft’ assets are not recognized in the financial statements.”
The fact is, whether or not human capital is officially recorded as an asset on a company’s books, investors already recognize and pay for the human capital and other intellectual capital of a company. We see this when we compare market values to book values. So, if human capital–or the knowledge workers within an organization–is an integral part of a company’s intangible assets, how can we get an objective view of the value of these assets if they aren’t reflected on a traditional financial statement? And, without an objective view of these assets, how can we hope to effectively build talent strategies that will drive business performance? That is where the idea of intellectual capital (IC) as a percentage of overall enterprise value comes in.
Calculating Intellectual Capital
The assets that people create, accumulate, and sustain utilizing their knowledge, experience, and skills–as well as the people themselves–can be defined as intellectual capital (IC). By analyzing and valuating the IC of an organization, investors, candidates, business leaders, and others can more accurately assess today’s businesses.
Intellectual capital is entirely the result of talent, and the value of IC includes the value the market places on an entity’s human capital. Using public company information and data, we developed the following algorithm to accurately and objectively calculate the IC value for publicly traded companies (and non-public companies, if they have the right data):
Step 1 – Calculate Book Value:
Net Equity + Net Debt (Debt – Cash & Marketable Securities)
Step 2 – Calculate Enterprise Value:
(Market Share Price x Shares Issued and Outstanding) + Net Debt
Step 3 – Calculate Intellectual Capital:
Intangible Assets (on books) + Goodwill + (Enterprise Value – Book Value)
Intellectual Capital accounts for roughly 80% of the value of the average public corporation today. In today’s knowledge-driven economy, it’s critical to understand the proportion of IC value in your organization and the components that make up your IC. This information will enable you to establish a strategy that effectively allocates talent resources in a way that drives shareholder value.
So, is it a fair analogy to refer to our people as “assets?” Absolutely. It’s time to cast aside the notion that referring to employees as “assets” is a trite, meaningless phrase. For many companies across many industries, people are not just an asset, they are in fact the most important asset.
Linda Brenner started Designs on Talent with the vision of helping HR leaders drive faster and better results in talent acquisition and talent management. Visit Designs on Talent at www.designsontalent.com or contact Brenner by e-mail at firstname.lastname@example.org.
Copyright © 2015 Mamu Media, LLC All Rights Reserved.