Human capital—the elusive asset; measuring and managing human capital: a strategic imperative for HR - 2003 Research Quarterly

HR Magazine, March, 2003 by Leslie A. Weatherly

HUMAN CAPITAL IS ARGUABLY THE MOST VALUABLE ASSET HELD BY AN ORGANIZATION TODAY. It is also the most elusive asset to manage for a variety of reasons. The primary purpose of this article is to describe the terminology associated with human capital and its context within an organization. Its secondary purpose is to discuss the implications for he HR professional. HR practice leaders who ae serious about making a difference must be able to "measure" the business impact HR-driven programs have on their organizations in order to demonstrate the merit and worth of these programs. Only by ensuring that HR metrics are recognized and valued on an equal footing with other business metrics routinely used by the CEO and management can the HR practice leader be assured an equitable position as a key member of the senior management team. These metrics must, of course, measure the value and return on investment in human capital to the organization. This is both a challenge and a strategic imperative for today's HR professional.

Calculating the value of human capital (HC) is not easy--because human capital is not like other capital. With rare exception, HC simultaneously represents the single greatest potential asset and the single greatest potential liability that an organization will acquire as it goes about its business. While there are other intangible assets, HO is the only intangible asset that can be influenced, but never completely controlled, invested in wisely, or wasted thoughtlessly, and still have tremendous value. These distinguishing features are what make HO unique, and also what makes it an elusive asset.

"Although we would agree that most CEOs are acutely aware of their investments in their most valuable asset (salaries, benefits, training, recruitment programs and the like), almost none could tell you what their most valuable asset is worth." (1)

Perhaps the best place to begin this discussion is to outline the business elements that create value in an organization in order to lay the groundwork for understanding the context within which human capital carries out its work.

Organizational value is comprised of three major classes of assets that are integral to an organization's ability to produce goods and services. These are:

* Financial Assets: Financial assets include assets such as cash and marketable securities, and may also be referred to as financial capital;

* Physical Assets: Physical assets include such tangible assets as property, plant and equipment, and other furnishings; and

* Intangible Assets: Examples of intangible assets, also called intangible capital, include intellectual capital (patent formulas, product designs, and process technology, i.e., the methods that delineate the steps in a process), goodwill, and human capital.

Definition of Human Capital

Surprisingly, human capital is not the people of an organization per se. That's because people exercise control over their human capital and are free to invest it as they see fit in different aspects of their lives: family, community interest groups, observance of religious beliefs, physical fitness pursuits, other outside interests, and work. As such, the following definition of human capital is offered:

A company's human capital asset Is the collective sum of the attributes, life experience, knowledge, inventiveness, energy, and enthusiasm that its people choose to invest in their work.

Clarifying Intangible Capital

So, what is intangible capital, really? Intangible capital or intangible assets are as valuable as financial and physical assets; you just can't discern them by touch, i.e., they are without physical substance and are non-monetary. They are held by an entity to produce or supply goods or services, to rent or lease to others, or for administrative purposes. For reasons already described, they can be difficult to measure and are not always addressed in concrete terms in the typical public accounting disclosure.

Intangibles also comprise other forms of capital (see Figure 1). From a pure accounting perspective, financial assets and physical assets are generally easier to classify and value than intangible assets. For example, intellectual property is legally defined and includes such things as patents, trademarks, and copyrights, which are included under the general definition of intellectual property. However, these assets are the only form of intangible assets that are precisely defined for accounting purposes. All other forms of intangible assets are loosely defined, open to interpretation, cr are simply handled as costs. To compound this situation further, patents, trademarks, and other intellectual property rights are recorded at their registration cost rather than their market value, which may or may not be higher than their price at purchase.

For the purposes of this article, our primary focus is human capital. While some might say we could define human capital as the accumulated present value of our employee investments (salaries, benefits, training and development programs, etc., invested on behalf of the organization), the question still remains, how would you go about putting a definitive value on that investment?