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Are Employees Assets or Liabilities?

This article was originally posted on the Thinkers50 Blog

Oscar Wilde is credited with the quote “The cynic knows the price of everything and the value of nothing”. And some say this is a reflection of most financial executives’ mental model.

To be successful any company requires assets. These range from cash to securities and from tangible fixed assets to goodwill. At a more granular level, they are divided into two main types of assets: current assets and non-current assets. These classifications are used to aggregate assets into different blocks on the balance sheet, so that the relative liquidity of the assets of a company can be discerned.

However tried-and-true the financial-accounting system is, it’s overlooking an important aspect of the value creation process. None of the financial recognized assets can create customer value (which in term drive profitability) without human intervention. Take for example, the 3D printer in an innovation lab. Is listed in the company’s books under tangible fixed asset. But, by itself, the printer can’t create anything of value. The printer requires a human to design a prototype, of what can later be the company’s next flagship product. The same story can be replicated for every other financial recognized asset.

The big issue at hand is that the financial-accounting system is recording under OPEX the human resource element and the time/process of creating customer value from accounting recognized assets. So basically, from a CFO’s perspective all the employees are liabilities. Fact that’s flying in the face of the popular ‘people are our greatest assets’ aphorism.

Proof that executives live by the financial account system and not by the ‘people are our greatest assets’ cliche is that when cost cutting is required, the first action is to lay off staff, cut wages or reduce spending on training.

By classifying employees (and to a greater extent culture and processes) as assets, it would then be in the company’s best interest to try to increase the value of these assets. This can be done by the company investing time and money, through training, mentoring, developing and improving. If  the employees feel valued their sense of job satisfaction will increase. The benefit to the employer is a more committed workforce, lower absenteeism, lower staff turnover and better qualified staff, all leading to higher productivity.

There are however blue chip organizations out there listing and treating their people as assets. These organizations are professional football clubs. An analysis of Manchester United PLC’s (Public  Limited Company) annual report submitted to the New York Stock Exchange paints a clear  picture as to how players are treated in accounting terms and how they  are shown as assets in the balance sheet.

From the report, it can be inferred that the accounting treatment for player registrations is in no way different from any other capital asset. The cost of acquisition of a player is amortized over the period of his contract through the straight-line method.

It’s not realistic to hope now that banks, for example, will start treating employees as football clubs treat their players. But there’s one thing that CFOs can start doing in the absence of an alternative complementary accounting system design to show value in intangibles. They can look into the financial accounting documents and identify strategic resources. These strategic resources will than be nurtured and developed as the financial assets are. According to professor Bruch Lev a strategic resource has the following attributes:

– they contribute directly the value creation process. For example they file patents or create new products and services.

– they are scarce or limited. For example a telecommunication 5G license,  a certain airport landing rights or a banking license.

– they are difficult to replicate or imitate. Competitors are not able to easily imitate or copy them. For example Apple’s AppStore or Zappo’s customer service culture.

Enterprises operating effectively their strategic resources are able to consistently stay ahead of the game. Making their present and future competitors constantly play catch-up. Hence gaining a sustained competitive advantage.

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