Imagine operating an industrial firm without the discipline of financially evaluating capital projects, without formalized cost accounting, without differentiating between spending that creates an expense from spending that creates an asset, without auditing internal controls or reported results. It seems unthinkable, yet that’s how most organizations are managing human capital investment today.
In today’s increasingly digital economy, investment in human capital will drive future market capitalization in most companies. However, HR staff does not traditionally have the skill set to achieve this need on its own, any more than manufacturing operations did in the past. To maximize value, human resources will require a different level of partnership with finance to enable focus on human needs that will differentiate between critical and noncritical roles in the organization.
Three fundamental tasks finance organizations must prepare for to help HR connect talent investment strategies to creating value are:
- Defining the principal intellectual capital underlying the business’s market value and assigning relative value to its components. Depending on the industry, the value of intellectual capital is generally significant, exceeding 90% of total market value in some companies, and its sustainability relies primarily on the success of talent investments over time. More often than not, these components headline companies’ presentations to the investment community (brands, trademarks, patents, customer relationships, technologies, market reach, etc.), but HR determines talent strategies in isolation.
- Driving the mapping of these intangible assets back to their human sources in the organization and prioritizing the impact of those sources. By definition, intellectual capital originates as output from human capital in critical roles. The specific roles vary by industry, and must be understood through the context of the work they do. These critical roles can be identified through analysis of the work that generates components of intellectual capital, an exercise outside of the typical HR skill set.
- Providing the analytical and financial leadership to ensure that the investment in people strategies for critical roles is proportionate to their value and that the return on these investments is being achieved. Due to the nature of what critical roles produce, spending against them can truly be considered investment regardless of their treatment as expense from an accounting standpoint.
While these three undertakings are likely out of the ordinary for most finance organizations, they fit the skill sets found within finance, which are generally absent from HR: familiarity with market valuation and intangible assets, mapping business processes and activities, and analytical fluency.
A possible future accounting and disclosure of human capital?
Finance and HR functions in companies will need a partnership that enables effective management of the organization’s people. As the investor community increases its understanding of market value derived from human capital, the need for information about a business’s people strategies, practices, and experiences will have to be addressed. The value of such a partnership meets internal needs today and tees up the ability to meet potential external needs of tomorrow.
The way forward
Forward-thinking companies will strategically outline a new relationship that differentiates between people as a cost versus an asset and which draws on the strengths of both functions. By embracing the role of managing and maximizing the value of the company’s most important asset, finance professionals can strategically lead their organizations in driving business success and growing value for stakeholders.
Tom McGuire has served as a CFO and global talent leader for Revlon Consumer Products and Coca-Cola, respectively. He is the author of Talent Valuation: Accelerate Market Capitalization Through Your Most Important Asset (2015).