| Background
MCS is set to revolutionalize the world of work.
People are the greatest asset for any organization.
Right People with the Right Skills, Right Knowledge
upon the Right Attitude on the Right
Job is the essential ingredient for any successful
organization. Show me a company who is successful
and remains successful and I will show you a company
that has invested extraordinarily in his
people. (Notice the choice of word “invested”
and not “expensed”.)
Empirical research shows that organizations that
make extraordinary investment in their people
knowledge often enjoy extraordinary
performance on a variety of indicators including
shareholder return.
An organization’s success in today’s
Knowledge Economy depends on its intangible assets
and its continued investment on these assets –
particularly human capital defined
as the collective skills and knowledge
of its workforce. If this is true, is
it not time for companies’ investment in
developing their human capital to be made public?
Despite the increasing frequency with which CEOs
repeat the mantra that “people are our most
important asset,” the market pressures on
them to maximize quarterly and annual earnings
almost certainly reduce firms’ incentives
to invest in human capital, leading to an under-investment
by most firms. It is therefore no wonder that
once quarterly earnings are below analysts’
predictions, the training budget is always the
first to be freezed.
While this strategy may increase earnings in
the short term, it is myopic, as research shows
that treating employees like the assets they really
are- by investing in their development –
boost returns over the long term.
Accounting
Treatment of HC Investments
The current accounting treatment of firms’
investment in human capital development (buried
as costs in the balance sheet) is based on the
premise that “People (their knowledge
and skills)” are the only organizational
asset that cannot be owned. Unlike other assets,
employees can permanently walk out the door whenever
they chose. Consequently, the future revenue streams
attributable to investments in people are not
guaranteed to accrue to the firm that made the
investment.
A reason why most firms now decide to sparingly
train their people or some don’t even train
at all. They frequently say to me: “What
if I train my staff, and they move on?”
A question that I answer with a better question:
“What if I don’t train my
staff, and they stay on?” Selah
But if People are truly an organization’s
greatest assets, then the training and education
of those assets has to be viewed as investment
in human capital and not just
as another expense. Organizations that grow are
those that obtain and manage knowledge the quickest
and cheapest.
MCS
findings….
A research carried out by our foreign affiliates
in the US, suggests that firms that make unusually
large investments in human capital development
appear to subsequently enjoy excess (supernormal)
market returns. This is consistent with the idea
that training investments have future benefits
to the firm which the market capitalizes even
though they do not immediately appear in accounting
profits. The existence of this supernormal return
suggests that most firms may be under-investing
in their workers’ human capital development
(even without considering the social benefits).
It is also clear that portfolio investors guided
by training expenditures (that are properly aligned
to business goals) would be expected to outperform
the market.
An analysis of 157 Michigan manufacturing firms
that applied state subsidies to support private
training (Holzer et al… 1993) shows that
the receipt of these subsidies increases the firms’
training hours by a factor of two to three
in the short term, and reduces output “scrap
rates” by around 13 percent earning them
dollar savings of between $30,000 and $50,000
per year. Also, another research showed that
footwear manufacturers were experiencing a very
large boost in value-added per employee through
their training activities, with returns to the
firms of up to $5,000 for every $100 spent.
Findings
Conclusions
In a well-functioning economy, capital markets
allocate resources to the most productive firms.
The prospect of increasing shareholder value motivates
firms to engage in productive activities, while
the lure of above average returns leads investors
to direct funds to the firms that undertake such
activities.
Firms that engage in unusually high levels of
training subsequently experience far higher gains
in stock market valuation compared with those
firms spending the least on employee training.
The findings reveal an UNEXPLOITED INVESTMENT
OPPORTUNITY (a hint for Capital Market Traders):
- the possibility of investing in those firms
that engage in the highest levels of training.
This opportunity could have additional effect
of motivating firms to document and publicly reveal
their training investments, as well as encouraging
them to undertake additional training investments.
This later possibility could in turn create benefits
not only for firms and their investors, but also
for workers and society
The end result is that encouraging investors to
begin to pay attention to how firms invest in
the human capital of their employees could promote
a process through which firms begin to
view their workers as assets rather than
costs…..
Submitted by Afolabi
Imoukhuede, Managing Consultant, MCS
Consulting Limited Ikoyi, Lagos
aimoukhuede@mcsworldgrp.com
Knowledge Companies...Who
Are They?
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