Tuesday, 16 December 2008

Human vs Financial Capital?


The increasing importance of human capital, not!

I used to use this slide, from Baruch Lev at Brookings Institute, in a lot of my presentations to illustrate the increasing importance of human relative to financial capital.

I don't do so anymore.  I don't know exactly what has happened to the graph during 2008, but it seems pretty clear than tangible assets (explained market value) have once again established themselves as a much more significant proportion of overall market value, and that therefore, from this way of looking at it at least, the importance of intangibles, including human capital, has reduced.

We seemed for a while to be operating in an environment where human capital, rather than processes / technology or financial capital, was the key driver for competitive advantage.  I used to argue that this made people management the core business process, and made HR the most important business function too.  However, for many firms, those days have, at least temporarily, gone.



So I was interested to see a post on Donald H Taylor's blog responding to an article by Richard Donkin, which noted that "the tired assertion, ‘people are our greatest asset’, has been disproved by the credit crunch".

I think Richard and Don both made good points, and I was particularly enjoyed reading Richard's suggestion that we also need to value, or at least take account of the role of "abstract, human, emotional, constituents - trust, love, anger, panic".

The arguments for and against human and financial capital have also been made elsewhere, for example, in Deloitte Debates.

Deloitte makes the case that although the financial crisis is getting all the attention, the talent crisis didn’t just magically disappear.  However, their counterpoint is that "actuallly, it sort of did. This might sound harsh, but the recent market crash may actually ease the talent crunch by forcing workers to put off retirement for a few years".

Another good point...



My summary of all of this is that is that the human capital / people are our most important asset argument currently doesn't hold as well as it did before.  So as I said earlier, I'm no longer using it.

I don't think it matters too much - there are plenty of other reasons why people should remain an organisation's top priority.

I'll see if I can come up with a list if you'd like...



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