People on the Balance Sheet

If PEOPLE are your most valuable ASSET, where are they in the FINANCIAL STATEMENTS?

In today’s “knowledge economy,” people are the core contributors to shareholder value. People invent products. People serve customers. People lead companies.

In fact, in 2010 80% of the market value of the S&P 500 was attributable to intangible assets – which include brands, patents, and people.

 

But if this is true, where are people accounted for in the financial statements?

Today, people are generally classified as expenses (i.e. salaries) on the income statement or as liabilities (i.e. pensions) on the balance sheet — not as an investable asset.

Thus, when CEOs seek to increase profit, they cut costs — like people — rather than investing in assets — like people — that can appreciate.

Quantifying the value of people and then reporting it in the financial statements would enable users to better understand the economic reality of a company. It would also provide them with more relevant information with which to make sound investment decisions.

What choices are there to value people as assets?

Four decades ago in the 1960s, researchers and academics began to create methodologies that they hoped would close the information gap between tangible and intangible asset reporting.  A group of researchers at the University of Michigan authored a series of papers to develop the field of “Human Resource Accounting.”  In January 1967, the Harvard Business Review even published, “Put People on Your Balance Sheet,” which discussed various methodologies for classifying human resources as assets, including:

  • Historical Cost
  • Replacement Cost
  • Opportunity Cost
  • The Lev-Schwartz (PV of Future Earnings) Method

However, HIP has not discovered any U.S. or European firms that account for people in this way, even though several global firms based in India, like Infosys and Tata do.

Will YOUR FIRM be the 1st to do so?  EMAIL us at Services@HIPinvestor.com if you want to lead the way – or already are.

To read more about this concept, visit an article by our Tom Bowmer and Paul Herman on The Huffington Post, Paul’s article on Sustainable Brands or his Presentation from the New Metrics of Sustainable Business Conference at Wharton.