Accounting quirk underestimates the value of a worker

It happens regularly all over the world and in every company. The chief executive addresses his collaborators: "You are the most important resource of this company." He believes it and he is right. His collaborators listen politely but are sceptical. They are not wrong. They know that during the slightest economic downturn, the "most important resource of the company" will immediately pay the price for it.

At the heart of the problem is an accounting peculiarity. The employees of a company appear in the balance sheet as a cost and not as an investment. In other words, they are on the wrong side of the balance sheet. If a company employs 100 geniuses or 100 fools, they are accounted for in the same way, namely, as a cost. Such an approach completely underestimates the investments made in the know-how, the professional and individual development of a person. It also ignores the loss of experience and skills when that person leaves the company.

Could it be done otherwise? From an accounting point of view, the approach is based on two assumptions. In the first place, employees are excessively mobile. The most important resource of the company leaves in the evening at six o'clock to return the following morning at eight o'clock. How do you give an accounting value to a "company's most valuable asset" when it wanders the obscure streets of your city at night? Historically, this was why employees were paid on a weekly, then a monthly, basis; it was to make sure they came back.

In addition, and this is the central idea, employees do not belong to a company. Therefore, they cannot be accounted for as an asset in the same way as a machine or a building. It is certainly correct, but it cultivates a deep ambiguity regarding the value of people. Several economists prefer to use the term "human capital". But it is not the way employees are accounted for in the valuation of companies. Stock exchanges always favour companies with the least employees compared with turnover.

For example, Google has a market capitalisation of US$576 billion (S$819 billion) and employs 72,000 people. Facebook is worth US$390 billion for a workforce of 15,700 employees. In comparison, General Motors, which has 215,000 staff, is worth US$56 billion, and Ford, which employs 99,000 people, is valued at only US$49 billion. It is not only size but also competence which counts. Mr Bill Gates has said: "What would Microsoft be worth if it was sold without its collaborators; one dollar?"

Nevertheless, accounting standards prevail. When a company downsizes its workforce, the market considers that it has reduced its costs and therefore the share price goes up. It is absurd because, in actual fact, the company loses management competencies and personal skills, and should be less valuable.

The monetary aspect is not the only one to consider. There is a value which stems from a shared culture between the company and the collaborators: attitudes, written or unwritten rules and a sense of mutual respect. To have value, we must feel valued. It implies a sense of intellectual affinity and even emotional closeness which must permeate every level of the company. As Franklin D. Roosevelt once said: "A good leader cannot go too far from followers."

  • The writer is a world authority on competitiveness and has pioneered research in this field. He is a professor emeritus at IMD business school in Switzerland where he founded the World Competitiveness Centre.
A version of this article appeared in the print edition of The Straits Times on February 11, 2017, with the headline 'Accounting quirk underestimates the value of a worker'. Print Edition | Subscribe