In his song “Blizzard of Lies,” the jazz pianist Dave Frishberg ticks off some of the fibs that we utter with stunning regularity: “We must have lunch real soon.” “I’ll get right back to you.” “Your secret’s safe with me.” “This won’t hurt a bit.”
Missing from his list is the lie told most routinely throughout corporate America: “Our people are our greatest asset.”
We know that this can’t possibly be true—not as a general matter, anyway—when wages for the vast majority of workers have been stagnant for the past four decades, healthcare benefits and retirement security have been steadily shrinking, and most companies offer little, if any, training to the bulk of their employees.
Of course, some of this shabby treatment can be attributed to this factor: Employees really aren’t “assets”—at least not from an accounting standpoint. In the world of finance, human beings have never been regarded as highly as land, buildings, and equipment.
R. Paul Herman, CEO of HIP Investor, a firm that rates the human, social, and environmental impacts—and their links to profit—of more than 6,500 global companies, wants to fix that.
This week, at the Sustainable Brands New Metrics conference in Philadelphia, Herman will again raise a question that he’s been asking for many years now: Why aren’t investments in employees counted as assets on the balance sheet? In fact, if you put money into upgrading your workers’ skills, that’s recorded as an expense on the income statement.
“We need to shift from seeing people as a cost center to seeing them as a value center,” Herman says.
How Accounting Stacks The Deck
Herman isn’t the only one calling for such a rethinking. Peter Cappelli, a management professor at the University of Pennsylvania, also has criticized the “way in which accounting stacks the deck against investments in human capital.”
The ramifications are not trivial. A strong balance sheet can help a business qualify for loans or credit from the bank, as well as serve as a signal to the market that a company is poised to thrive over the long term. If developing employees actually bolstered the balance sheet, companies might well be inclined to do more of it.
What’s curious is why this notion hasn’t gotten more traction. After all, as Herman has discovered, the idea has been kicking around for half a century.
“An employee is expensed as if he were a kilowatt hour or a pound of copper,” with management conditioned “to minimize the expenditure,” two accounting experts complained in a 1967 Harvard Business Review piece titled “Put People on Your Balance Sheet.”
“No organization which handles its employees as expense items,” the article asserted, “can make as wise plans or as rational allocation decisions as the one which recognizes explicitly the asset characteristics of its human resources.”
A few companies have experimented with the approach. Five years ago, the carpet manufacturer Interface calculated the value of its employee training and—for internal discussion purposes—added the number as an asset to its balance sheet.
Although the company had long been teaching its 5,000 front-line workers a broad range of topics—including systems thinking, communications, and design—it had never before tried to measure the economic effect of this investment. “It was assumed to be positive,” says Erin Meezan, the company’s chief sustainability officer. “But it was too buried.”
Going through the exercise, Meezan says, solidified Interface’s view that “people should at least be on par with, if not trump, machinery” when it comes to making decisions as to where to invest. And that, in turn, helped lead to the creation of a new position: chief human resources officer, who today is charged with ensuring that any new corporate strategy fully considers how employees fit in.
“How Is This Going To Make Me Look?”
But why hasn’t this caught on more? Why hasn’t it become baked into financial reporting?
Jeff Higgins, CEO of the Human Capital Management Institute, which supplies workforce analytics, says that “one of the biggest holdups is HR itself.” That’s because, once you start to quantify how meaningful a company’s investments in its people truly are, the managers in charge are bound to ask, “How is this going to make me look?” Companies that don’t train or treat their people well could conceivably be saddled with a liability—not an asset—on the books.
“There’s a lot of ambivalence within HR about this,” says Higgins, who held senior finance roles at Johnson & Johnson and Colgate Palmolive and was a senior HR leader at Countrywide Financial and IndyMac Bank.
Others suggest that companies may be resistant because it could hit them where they are most sensitive: in the wallet.
“When you start to recognize the value that people bring to the table, you have to pay those people for that value,” says Joy Pettirossi-Poland, president of a sustainability consulting firm called Building Bridges, who in 2015 put together a task force on valuing human capital and other intangibles for the Rhode Island Society of Certified Public Accountants.
Meanwhile, some blame technical hurdles, pointing out that it’s more challenging to assign a value to a person than it is to a new factory; companies don’t “own” people in the same way that they do physical objects.
But this excuse takes you only so far; other assets that are tricky to capture, such as “goodwill,” appear on the balance sheet. Plus, as Herman explains, scholars in the 1960s and ’70s laid out no less than four different methods to account for employees: using their historical cost, replacement cost, opportunity cost, or the present value of their future earnings.
In the end, Herman believes, it is “lack of imagination” among those in the corporate community that has stymied things.
That, though, appears to be changing as more and more investment dollars are directed to companies that are deemed to be good stewards of the environment and of their people.
“We’re learning. We’re introducing new concepts. We’re making progress,” says Michael Kraten, an accounting professor at Providence College, citing efforts to define and measure human value by the International Integrated Reporting Council, the Sustainability Investment Leadership Council, and others.
Still, for this movement to penetrate the mainstream in the United States, it will ultimately require action by the Financial Accounting Standards Board, which establishes what information must be presented to investors and others who use financial reports.
In September, after receiving a lot of public input, FASB announced additions to its technical agenda. Accounting for intangible assets, including human capital, didn’t make the cut.
However, FASB is still mulling whether to eventually mandate that companies account for “people assets” in the footnotes to their financial statement, if not the balance sheet itself. “We are looking at this,” says Christine Klimek, a spokeswoman for FASB.
Herman, for his part, is determined to keep pressing the issue—even if he isn’t holding his breath. “We’ve known the answer for 50 years,” he notes. “We just need boards, CEOs, and CFOs to do what they say is most important.”