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Financial statements and human capital

Measuring the real value that people bring to any organisation is problematic. There are many factors to be considered, and traditional financial standards are not directly relevant. In this Management Extra article, Professor Andrew Mayo of Middlesex Business School analyses the case for measuring human capital, and outlines the different approaches available.

The statement 'our people are our most important assets' has become a cliché that often leads to a cynical smile. One reason is that what people experience in practice is not necessarily consistent with what they think this statement means. Others will be more analytical in their critique. In this article, we will look at some of the issues surrounding the statement, and current thinking about what is generally called 'human capital management'.

There are of course problems as soon as we start to apply well established financial terms to people - who certainly do not fit comfortably with the standard definitions of 'assets'. Most of them appreciate in value with time, and it is rare that they can be 'transacted' at will. The concept comes more from the distinctions between 'tangible assets' and 'intangible assets' as drivers of value, and the original work of Leif Edvinsson and others in Sweden in the early nineties. As they recognised the ever widening gap between market and book value of most firms, they analysed it by distinguishing different types of 'capital' contribution. One of these was clearly a firm's 'human capital'; however they never did imply that all people in a firm were automatically 'value creating assets'.