Monday, October 15, 2007

Human capital and accounting, or how to learn foreign languages

On October 11th, there was a passionate discussion about investment decisions regarding human capital at AFPLANE, in Paris. HR directors from major French Groups, Partners from venture capital firms and from accounting firms argued about the best way to take into account human capital in investment decisions.

As a participant, I must say I had the feeling that no one really wanted to go deep inside the issue. As one partner from an accounting firm put it, "we have been asked to look for new methods to account for human capital for years and I must say I have given up looking". Basically, HR investments are expensed and capital investments are capitalized.

I was having a conversation with a good friend from Scientipole Initiative after the show. We argued that human capital issues were new to our accounting friends. And he told me that "some languages are just not ready to describe certain facts". He related a story from three points of view : entrepreneur, finance, accounting. Very interesting.

So yes, accounting is not ready to account for human capital, or at least I have not yet heard of an ambitious initiative. Is it the accounting cycle (year) that is not adapted to an accelerated economy ? In this case, it would be the balance sheet view that should change ... Is it actually the "industrial-age" vision of the economy that still drives accounting specialists ? Or is it just that we HR have not taken the matter seriously enough ?

Probably the latter. But the point is, when we invest some million euros in our key people development, interesting things tend to happen : new privileged relationships, new R&D projects, and new skills for these key people that they will some day negociate on the market.

That, to my mind, means that some value has been created, for the company and for the individual talents. We have to learn to identify the assets behind that value (and that should help close the growing gap between book value and market value of our companies).

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