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Our Employees are our biggest asset is a common refrain from most senior business leaders. As someone who has spent a lot of time with annual reports and financial statements, I have often wondered at the lack of insight on employee profile, development in them.

This made me look up the history of financial accounting and statutory reporting and came across the book by J R Edwards

It was interesting to read about the stages of accounting development, my quick summary below from the book:

  • Pre-Capitalist period (4000 BC – 1000 AD) – for record keeping of extensive trade to track goods & exchanges
  • Commercial Capitalism (1000 AD – 1760 AD) – investment of money in stock-in-trade and proceeds used to buy more stocks. Double entry bookkeeping was the key innovation
  • Industrial Capitalism (1760 – 1830) – innovation in machine use, factory system, abundance of labour and new energy sources. Accounting used as a mean of control – performance and resource allocation decisions.
  • Financial Capitalism (1830 –  till date) – Financing of public utilities, shift of London Stock Exchange from govt to company securities. Accounting challenges of capex vs opex, fixed asset valuation, periodic profit calculation and appropriate form of reporting for absentee owners. With this also came considerable legal regulations, companies acts and accounting and audit obligations on directors.

I understand the accounting reason of employees not figuring in balance sheets or other statutory statements since employees are not assets owned by the organisation.

As J R Edwards points out the emphasis of financial accounting has moved from record keeping to financial reporting and is still based on past and not ideal for investment decisions. Although organisations these days address this with their detailed annual reports with emphasis on market potential, key strategies, risks and plans; the employee skills aspect is still missing and is big gap in the knowledge led digital economy.

Human Capital – Key to company Future

Some of the question with regard to the above which I think about are:

  1. How can any valuation of an organisation be complete without considering how its talent is growing and how satisfied the employees are?
  2. How can we evaluate an organisation’s future vision without knowing if its employees are ready to embrace it?
  3. How can we believe an organisation’s claim to building the future of an industry without knowing if it has the right talent, skills and training for this future?
  4. How can we evaluate an organisations culture and the readiness for change when competing with disruptive startups?
  5. How can we know if the employees are the drivers of the future (as in they buy-in to this future) or if it driven by select few in the exec board?
  6. How can we know if an organisation has adequate succession planning and second level leadership to execute on the future vision?

Plus many more with regards to the role of its employees. One of the fundamental questions is Are your employees merely performing certain tasks (like your service providers) or they really assets which are helping you build the future?

I think one of the ways to assess this is for forward thinking boards to report on their human capital (something like the sustainability reporting or CSR reporting), without compromising on employee privacy and concerns of losing talent to competitions.

A non-financial reporting which address the talent pool will make it much more easier for investors to evaluate their investments decisions with having a much better picture of what the future looks like for the companies they’re interested in. I am sure this will require a lot of work for the companies involved but this exercise will be useful for their long term future and employee engagement in this age of digital disruption.

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