Book value, on the other hand, focuses on the net asset value (balance sheet bottom line) of the company based on historical costs.
The main factors that contribute to the healthy 3.5 multiple (that is, the contributing factors that are not on the balance sheet) are brand recognition and reputation, research and development and human capital.
There are a couple of reasons why human capital, that is the knowledge, skills, and experience of a company’s employees, isn’t listed on a traditional balance sheet namely:
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- Difficulty in valuation – Human capital is intangible. Unlike plant and equipment, you can’t easily put a monetary value on an employee’s experience or creativity; and
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- Lack of control – A company doesn’t own its employees, when they leave, they take their knowledge with them, and the value of human capital disappears from the company’s perspective.
Any CEO worth their salt will probably argue that human capital is their most important asset – even in less capital intensive industries. So, what should the human capital department’s approach and subsequent role be towards the sustainable maximisation the company’s market value?
Herewith a few thoughts:
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- Acknowledge that organisations exist to create and trade value (economic and social value) for the benefit of all their legitimate stakeholders – external (e.g. customers, investors, suppliers, communities, trade unions) as well as internal (that is, its staff).
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- Acknowledge that the creation of sustainable economic (financial) value is still the most reliable and comprehensive measurement of success – and since it is not a paradox, support and broadcast the hypothesis that human capital is the company’s most important and utilisable asset – and therefore the most valuable.
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- Acknowledge that to achieve the aforementioned, resources must over relevant time periods be allocated in such a way as to meet the relevant marginal conditions with respect to inputs and outputs, thereby maximising cash flow.
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- Ensure management understands that meeting employees’ expected economic and social value return expectations (measureable with employee satisfaction assessments) is not necessarily mutually exclusive.
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- Ensure management understands that in their pursuit to maximise cash flow, productivity and employee satisfaction (financial and social) is not necessarily mutually exclusive either.
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- Functioning within an open system environment, an organisation is enclosed by its external environment implying that, to some degree, the external environment (society) is represented within the organisation. It is therefore advisable that Human Capital departments transition from viewing organisations as closed systems to viewing said as open systems. Subsequently, managers’ journey to be more inclusive towards all legitimate stakeholders of the organisation should be encouraged and supported.
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- Reference and support the organisation’s stated purpose and strategic objectives as part of all human capital planning, acquisition, retention, and development activities. Be the loud counter voice should the espoused or even worse, the stated purpose, not aspire to improve collective human satisfaction in the regions they operate in.
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- Acknowledge that adaptiveness (that can also be considered as a form of resilience) is a reliable predictor of success, in all forms of life, and the absence thereof results in not only personal-level stress but potentially lost opportunity. The future will for generations be ‘’moving faster’’ and agility and resilience will be key to survival.
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- Human Capital departments need to assist managers and their team members with the requisite support to enable them to know and manage themselves and managing their relationship with others, that is, emotional intelligence.
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- On all the previously mentioned points, Human Capital departments will be well served by being even more science-based. A case in point; sufficient objective evidence routinely suggests organisational performance is sub-optimal largely due to psycho-social aspects. Yet very few business improvement projects focus primarily on the mentioned aspects. It’s time to make the most valuable asset more tangible.
In closing, harmony is a treasured goal shared by the vast majority of stakeholder groups. Harmony implies absence of conflict within oneself and among us. It implies the need to balance, to trade-off, to collaborate. The role of the Human Capital department has never been more critical, not only for their contribution to sustainable organisational performance but also for the benefit of the communities and even larger the societies they operate in.
