Thursday, 28 February 2013

Just Rambling II - Human Resource Capital

In many companies where the investment in machinery or information technology form a large part of  the assets on the statement of financial position, the significance  or value of human resources may be overlooked, or not accounted for on the face of the financial statements, except for the recognition of the net worth of the pension plan which the company holds for its employees, who are members of the plan.  After all assets can be realised and for those who are technologically savvy, the value of information technology in an entity is not measured in net asset value terms, but in the cost of the impact on the business of a catastrophe which destroys the technology used in the business or whether the dependence of the business on information technology is dominant or significant.
Another aspect of human resource capital lies in the knowledge of the business which employees who have been with the company for a period of time possess. Knowledge of the day to day operations of the company add value in that having someone who can be relied upon to carry out the activities of the business in an experienced and competent manner allows for good relationships to be formed with customers and staff alike. This caters to returning customers who spread good news rather than not so good news.
Also knowledge gained  from first hand work experience can lead to an employee being able to make representations on behalf of the company to auditors. Since in many instances audits start after the end of the financial year, in an economic environment of mobility which is tied to advancement and development of key players in an industry, staying in a company for a year and a half can be seen as a sign of maturity and responsibility which adds value and credibility to a person's resume  and interview, once the interviewer knows the correct questions to ask.
The  ability and willingness to retain employees can lead to an assessment of the stability of the business, where this may not have been looked at before.  Many persons view the high turnover of staff as an assessment of the value of the company, the values which the company are committed to, just as persons who move  around in the market are assessed on their stability and ability to commit.  However as a client of one of the companies where I worked once told me, that having persons who have worked in different companies for different lengths of time in their career can add value to a company as they have  had different experiences, been exposed to different systems, styles of management and that experience can add a lot of value just from having those experiences.

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