Calculating Intellectual Capital

By Desda Moss Jun 10, 2015
LIKE SAVE PRINT
Reuse Permissions

LindaBrenner.jpgBy Linda Brenner

If it looks like an asset and sounds like an asset, then it must be an asset, right? Well, if you’re an accountant, then the answer is probably a resounding “yes.”

But for years, those in HR balked at thinking about people in our organizations as merely “assets.” After all, these are people we’re talking about–not something owned or even controlled by an organization. Historically, accountants agree: Employees have not been recognized on a company’s financial statement as “assets,” mostly because it was difficult to quantify the value of human capital.

Yet, as former Securities and Exchange Commission chief Steven Wallman stated in a presentation to the American Institute of Certified Public Accountants, “Intangible assets such as brand names, intellectual capital, patents, copyrights, human resources, et cetera are generating an increasing amount of [a company’s] overall wealth. … With certain limited exceptions, such as the purchase of a brand name, these ‘soft’ assets are not recognized in the financial statements.”

The fact is, whether or not human capital is officially recorded as an asset on a company’s books, investors already recognize and pay for the human capital and other intellectual capital of a company. We see this when we compare market values to book values.

So, if human capital, or the knowledge workers within an organization, is an integral part of a company’s intangible assets, how can we get an objective view of the value of these assets if they aren’t reflected on a traditional financial statement? And, without an objective view of these assets, how can we hope to effectively build talent strategies that will drive business performance?

That is where the idea of intellectual capital (IC) as a percentage of overall enterprise value comes in.

In our new book, Talent Valuation: Accelerate Market Capitalization through Your Most Important Asset (Pearson FT Press, 2015), Thomas McGuire and I examine how business value, intellectual capital and talent are connected.

The assets that people create, accumulate and sustain utilizing their knowledge, experience and skills–as well as the people themselves–can be defined as IC. By analyzing and valuating the IC of an organization, investors, candidates, business leaders and others can more accurately assess today’s businesses.

IC is entirely the result of talent, and the value of IC includes value the market places on an entity’s human capital. Using public company information and data, we developed an algorithm to accurately and objectively calculate the IC value for publicly traded companies (and nonpublic companies, if they have the right data).

IC, which we will continue to explore in future posts, accounts for roughly 80 percent of the value of the average public corporation today. In today’s knowledge-driven economy, it’s critical to understand the proportion of IC value in your organization and the components that make up your IC.  This information will enable you to establish a strategy that effectively allocates talent resources in a way that drives shareholder value.

So, is it a fair analogy to refer to our people as “assets”? Absolutely!

It’s time to cast aside the notion that referring to employees as “assets” is a trite, meaningless phrase. For many companies across many industries, people are not just an asset; in fact, they are the most important asset.

Linda Brenner, @DesignsOnTalent on Twitter, is managing director of HR consultancy Designs on Talent.

About Book Reviews

HR Magazine's Book Reviews keep you up to date on must-read titles related to HR and other business topics through weekly book reviews, author posts and recommendations. Looking for a good read? Visit the SHRMStore, our online bookstore, for a wide selection of HR books from multiple authors and disciplines, or sign up for a weekly e-newsletter, which highlights new titles and special offers.

For more information on how to contribute to the reviews, view our author guidelines.

View SHRM Books that support HR Behavioral Competencies

Join Our Book Group

Discuss your favorite HR book on SHRM Connect in the SHRM Book Group.

You can also interact with the SHRM editorial staff and learn about SHRM editorial and publishing operations at the SHRM Publishing and E-Media Group on SHRM Connect.

LIKE SAVE PRINT
Reuse Permissions

SHRM CONNECT

Join SHRM's exclusive peer-to-peer social network

Join Today

Job Finder

Find an HR Job Near You

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 3,200 companies

Search & Connect