The Next New Business Rule…Will be Driven by HR
Guest article from John R. Mattox, II, Ph.D., VP of Action Learning Associates
Doug Gray, Ph.D., CEO of Action Learning Associates
Tangible and Intangible Assets
Financial capital is the lifeblood of businesses. It allows leaders to invest in the tangible and intangible aspects of the organization that will drive growth and achieve business goals. From an accounting perspective, people are an intangible asset. Like tangible assets such as real estate, buildings, computers, manufacturing equipment, raw materials, etc., WE KNOW that people bring substantial value to the organization.
“We hire the best people,” is not a marketing catch phrase for companies like Google, Amazon, Qualcomm, McKinsey, KPMG, and other organizations that rely on innovations and intellect to achieve their mission. The best people develop new technologies. They build products that can be patented and resold. They program better and faster to streamline business operations.
Yet, the accounting industry struggles with quantifying intangible assets and how to report them on.
Why is this so important?
Investors (individual or corporate) review auditing statements to determine whether a company is a worthwhile investment. An article by EverEdgeGlobal.com titled The Missing Trillions: Valuing Intangible Assets provides several examples of the disconnect between current valuation statements and actual value in the market. Here is the quote that kicks off the article, “According to a recent report from the UK Treasury, the world’s five most valuable companies are together worth £3.5 trillion, yet their balance sheets report just £172 billion of tangible assets. The other £3.3 trillion of value is missing in action.” Investors are no longer well informed because accountants cannot accurately report the value of intangible assets.
HR is going to drive change for business within the next 3 years.
Until recently, the only human capital metric that was required for public reporting by the Securities and Exchange commission (SEC) was the number of employees.
On August 26, 2020 the SEC ruled that companies should start reporting information about human capital. Why? Wouldn’t it be valuable to know the turnover rate within an organization or the vacant positions among leadership? What about culture? Diversity? Ethical violations? Would this information change the way you value a company and influence whether you invest or not? The SEC’s answers to these questions are yes.
The International Standards Organization (ISO) agrees.
In 2018 after several years of discussion and development in technical committee, the organization approved ISO 30414, a standard for Human Capital Reporting. This NEW standard recommends that large organizations report 23 people metrics and small organizations report ten metrics.
The ISO encourages organizations to adopt these standards so all organizations can provide useful information to stakeholders. The standards also allow for comparison across organizations—again, to help make more informed investment decisions. The standard also serves as a guide for organizations that are not measuring human capital well. It is a playbook of important measures. Peter Drucker said, “If you can’t measure it, you can’t improve it.” Here is the opportunity for organizations to get better by measuring and managing one of their largest costs and also one of the greatest influencers of profitability.
What are the Human Capital Measures?
The ISO standard contains 11 general reporting areas which are listed below:
- Compliance and ethics
- Organizational culture
- Organizational health, safety, and well-being
- Recruitment, mobility, and turnover
- Skills and capabilities
- Succession planning
- Workforce availability
Along with these reporting areas, the standard provides specific metrics and recommended ways to calculate them.
Expect updates to definitions and calculations in the coming years as practitioners adopt and apply the standard.
Employees are gaining recognition as a differentiator that adds more value than traditional tangible assets. For decades business owners and audit leaders have struggled to frame and quantify the value that employees bring. Now with the ISO 30414, there is a viable framework and detailed measures for demonstrating value.
The SEC is now requiring publicly traded companies to report material information about human capital.
Let me repeat that: The SEC is now requiring publicly traded companies to report material information about human capital.
Measurement and reporting of these metrics will provide investors with valuable information to fuel decisions. It will also provide business leaders with valuable metrics to monitor and manage a critical driver of success.
If you need additional information, please contact John Mattox or Doug Gray at Action Learning Associates by phone 615 236 9845. We can help your team measure and manage your ISO 30414 compliance initiatives. Get ahead of the curve. Call us today.