HRM and the triple bottom line (do we really believe in people?)
26 February, 2008
I’ve blogged before about hard and soft human resources management, about the Michigan and the Harvard model, about to paying lip-service to it and the gap between theory and practice, and even about commitment (to commit or not to commit). But the more I think of HRM versus the old paradigm of “personnel management”, the more inconsistencies I detect.
Because if people was that important, it would be somewhere in the so called triple bottom line of the company, made of finance, social corporate responsibility a.k.a. CSR and sustainability a.k.a. our carbon footprint.
I feel that HRM is surprisingly absent of the triad.
But if we are to believe that people are our greatest asset they should be at our triple bottom line somewhere. Or even in several places.
The first place to look could be in financials. Maybe we could find our people in-between assets? I do not think so. After all assets are usually accounted at acquisition prices. And, fortunately, people are no longer acquired in the slave market. Consequently people are not assets for any company. Not anymore.
Where are those fundamental assets for the competitive advantage of the organisation? It’s funny to point that, not being assets, our relationship with our company is actually accounted as an expense. And some related concepts, such as our pension funds as liabilities… (wait, that’s not true, the pension funds are one of the main sources of creative accounting… where finance becomes an art. I’ll write about this another day though…)
In any case, it’s quite clear that our skills and abilities are not on the assets list. Neither the real value of our relationship with our company. Even when the opportunity cost of our leaving the company can be measured with the cost of recruiting our substitute, the cost of training her, the cost of the information the organisation is going to lack now, the cost of under-performance for our customers and many more.
But when we, employees, were encouraged to pursue our own learning and self development, it was clear that those assets would consequently become ours. So there’s nothing wrong with measuring assets that way. We are just another provider in an increasingly complex and atomised supply chain. Maybe we can still be in the second or third bottom line. Around corporate social responsibility, as stakeholders that we are. After all shareholders are only entitled the rights to the residual earnings, after the employees, the creditors and the state.
Let’s wake up. CSR and carbon footprints are only valid arguments when the company is earning money. But there’s only one bottom line: finance. And after that bottom line and before the second and the third there are still other business priorities as well as short-termism, insufficient resources allocated, resistance to change, and distrustful organisations. A huge gap that can’t be easily bridged. At least not with rhetoric.
Entry Filed under: Business, HRM, MBA, Management, b-school. .
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1.
Lev Peker | 27 February, 2008 at 12:12 am
Actually, when a company gets purchased, depending on what they do and whether people actually are it’s greatest “Asset” the valuation would assign a value to it. Sometimes in the form of goodwill sometimes in another form but if people are truly valued it will be part of their valuation.
Also what about service companies such as Morgan Stanley etc. where if you take away all the people there is nothing left.
2.
gabrielbcn | 27 February, 2008 at 10:58 am
First of all, thank-you for the comment. It’s a very good and important reflection to make.
You are absolutely right, Lev. When a company is purchased the necessity to align the value in books and the transaction value, as well as the seven-hundred-year-old requirement of double-entry accounting, makes goodwill arise as a new entry in the books. A new asset comes to life.
One might be tempted to say that the goodwill reflects the difference between reality and books, but that’s the reality of the transaction only, made in a certain moment and under some specific constraints. It’s the transactional reality that counts, on the basis of something that has already happened.
The real value of the company, if that construct really exists, will change with time, and will be approximated it in many ways, from share values to discounted future influx of capital, with different parameters that will range from the subjective to the objective. Whatever value you get, it will only be one particular glimpse of what the actual reality is based on an specific set of assumptions.
One of them could be that the value of the company depends on its future expectations, on what the company will be able to earn in forthcoming years. In the Morgan Stanley example, if the employees all left, or if there was a corporate scandal, there would be huge loss of future value. It has happened before.
In contrast, accounting looks backwards, thus takes into account what has happened before, and what our prudence tells us will happen in the future (for example if we hold some stock in our portfolio that we still haven’t sold but has already plunged). In that way it includes goodwill as the remain of a past transaction and little more than that.
Goodwill is one of the scarce points where both accounting and valuation come a bit closer together. Nothing more than that.
But look at the irony: even with goodwill raising the assets of the company after being bought, that goodwill can be amortised year after year. The value of the goodwill will be relentlessly decreasing towards its extinction. In the end, accounting wins. Is it a sign of the goodwill disappearing or is it a way of reducing profits and paid taxes? Simply another incentive to buying companies?
Best regards
3.
Human capital versus orga&hellip | 6 March, 2008 at 1:23 pm
[...] of accounting these different sets of knowledge as assets or not, as I reflected in my last post HRM and the triple bottom line (do we really believe in people?), there’s much more than that: the effective use of that knowledge is far more [...]