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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  1. Nice turn around from Human Capital to Financial Capital!

    When someone say that "human capital / people are our most important asset" doesn't hold, I seem to disagree.

    The society, culture, finance, politics and business - is for humans and by the humans. Humans bring good times, good business, good society and unfortunately, sometimes they bring bad too.

    Even the current financial crisis is because of erring humans and the Revival will be by the humans.

    Humans do matter always (at least on earth) and thus Human Capital.

    Gireesh Sharma
    Bloger @ Talent Junction

  2. Hi Jon, good summary and some interesting findings there. It will be interesting to look at retirement stats over the next couple of months.

  3. Interesting post Jon, and great links that you provided on this topic!

    I've included your post in my weekly Rainmaker 'Fab Five' blog picks of the week which can be found here: http://www.maximizepossibility.com/employee_retention/2008/12/the-rainmaker-3.html

    Be well Jon!

  4. Great post, Jon! The ratio of explained market value (“tangible assets”) to unexplained market value can vary greatly and for many different reasons. It’s therefore been tricky to directly link “unexplained value” to human capital anyway, even when the trend of the ratio was in one direction. What we might be seeing is more that shorter-term factors such as investor sentiment being driven negative by lower overall economic growth prospects and tighter credit overriding longer-term human capital factors such as productivity and innovation.


  5. Thanks Mark, Chris,

    Yes, I agree, I still expect to see human capital regaining the top spot, possibly (hopefully) even later this year.


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