Perhaps the worst management myth is that human resources, whether at the company level or at the country level, cannot be measured. The truth is, it can be measured, but only if top management doesn’t take a too deep look at the human resources function.
In a typical boardroom environment, we stay glued to the stats around ROI, earnings per share, dividend payouts, and growth forecasts. In determining the vision and future direction of the organization and in having strategies to stay ahead of the competition or even a new business, it is amazing to find many within the entity, who survive in assuming that they will do so through a presence of brick and mortar to conquer the markets. It is not even considered that no action plan can ever succeed without the participation of the critical factor of human resources.
Human resources are the most important unquantifiable asset that ultimately gives companies and organizations quantification. For what reasons, it doesn’t take long for competitors to poach the best resources and this resource jumps ship with invaluable knowledge capital that cannot be salvaged. In view of this possible loss of human capital, it is extremely important for senior management to conceptually estimate the value of the intellectual capital (IC) that is housed in an individual.
The coinage of the “knowledge economy” spread with the emergence of the newly industrialized countries of North and Southeast Asia; these countries recognized that economic development depended on acquiring unique traits, skills and knowledge for their human resources. They make the best use of the concept of the knowledge economy; later, it was adopted by several other Asian nations, so much so that today it is more cliché than actually real.
But, the concept of the knowledge economy has brought out the importance of human capital. The human resources of an entity or country, if properly educated, qualified and trained, become the fourth most important factor of production.
Human capital theory
What is human capital theory? Most economists and management scientists agree that these are the “resources” available to individuals or groups. The conversion of raw materials into salable products is often referred to as “physical capital”.
The acquisition of relevant academic recognition, supported by practical experience, with the aim of increasing personal income, current and future, is the main assumption surrounding the theory of human capital. The central point here is that the most outstanding objective and goal of education is the improvement of productivity, to complement economic growth. Thus, the cornerstone of the theory is that the combined stock of skills, knowledge, skills and personal traits goes towards the creation of intrinsic and measurable value, that is, it considers individuals as assets. constituents of their economy.
This vision of human capital is myopic, restrictive and limiting in its scope. It is said so because it fails to recognize the unquantifiable benefits that flow from an informed and trained human resource base. This aspect undermines the “cultural capital” of the entity.
Knowledge assets – intellectual capital
A fourth component added to the factors of production is the availability of knowledge assets. The promotion of a knowledge-based economy has fostered the recognition of “intellectual capital”, as a key resource for the sustainable competitive advantage of the company (Gregorio Martin-de-Castro, Pedro Lopez-Saez and others, Journal of Business Ethics (2011) vol 98: 649 – 622).
Knowledge assets belong to the realm of intangible assets, but recognizing it as capital makes it an economic status. The valuation differences between market value and book value are attributable to the non-quantifiable nature of intangible assets.
The theory that humans should be classified as capital remained underdeveloped until about the beginning of the 20th century. This notion of human capital was first introduced by Adam Smith, the 18th century economist (Wealth of Nations).
Human Capital (HC): The bulk of human capital is a total sum of capital subclasses including; cultural capital, social capital, economic capital and symbolic capital.
IC – Investment or expenditure
Theodore W Schultz, The American Economic Review, December 1961, vol. 51, nos. 5, pp 1035 – 39, examines in detail whether education is a consumer expenditure or is it an investment?
For basic education, no parent considers the associated costs as “investments”, so they are a consumption expense; but the economic motivations to pursue a career, by attending medical schools, dental schools, law schools, engineering schools, etc. can be seen as an investment in education, for the promise it contains of improving or increasing income. The theory reduces the status of a human being to monetary or economic beings (units).
A measurement tool developed in the 1980s, in a Swedish financial services company – Skandia, cited by Edvinsson & Malone (1997), page – 11, defines “intellectual capital (IC)” as “those dimensions beyond the human capital that were left behind when the staff returned home ”.
IC – It’s intangible nature
Measuring the intangible in purely accounting terms, to be recognized as additional capital, is difficult, because the concept is still in its infancy. IC has two main elements; human capital and structural capital.
Human capital captures the “knowledge developed and stored in the employees of the entity”, on the other hand, structural capital captures i) organizational capital; which covers culture, knowledge, formal and informal capital, and technological capital – stored in the technology of the entity that is “responsible for making products and services available”; ii) clients / relationship capital which captures the relationship that an entity has with its clients and which also covers the relationship with social aspects.
Reacting to Harry G Schaeffer’s views on human capital theory, Theodore argues that while this view only means that knowledge of the economic returns from investments in human capital, in terms of future income, should not be the exclusive basis for public policy decisions in making education spending, we fully agree.
Education dramatically improves the capabilities of individuals with a definite positive impact on future income.
IC includes the stock or funds of knowledge, intangibles, and ultimately the resources and capabilities, which enable the development of the organization’s core business processes, enabling the achievement of a “competitive advantage” .
Dean & Kretchmer (2007), who review a large body of literature, have developed some important characteristics of IC: knowledge that is tradable, inexpensive to reproduce, socially and contextually embedded; closely linked to social capital, dominant as a means of production; transfer cost difficult to calibrate, etc.
IC – Examples of examples – (bank and telecom)
These two industries best reflect the importance of knowledge workers and in the broader context of IC.
Bank A and Bank B have a similar capital base, almost similar balance sheets, the physical assets of the branch layout are not too dissimilar, in fact all things are equal; but in terms of reputational capital, relating to services, ethics, morality, etc., Bank A performs better than Bank B. Why? All this because of the composition of human capital. The first institution deals with the hiring of knowledge assets, while the other pays little attention to IC. The HR factor is a major determinant of their opposing reputation.
Likewise, two mobile operators, with an almost identical capital base and both possessing excellent human resources / capital (knowledge assets), have different financial results and different perceptions in the market, in terms of quality. on duty. One has an excellent technological platform, the other has a weak technological base and therefore the difference in the quality of service. Lack of organizational capital, which includes a subset of technological capital, is the cause of different outcomes.
Conclusion – case of Pakistan
Pakistan is fortunate to have a young population. These are potential assets; they need to be quickly converted into knowledge assets (acquisition of skills, education, traits, etc. through targeted learning and development activities) and finally to be recognized for the possession of ‘an intellectual capital, which is in reiteration a total sum of human resources. capital, relational capital / customer, and structural capital, (technological capital plus organizational capital).
In conclusion, the focus on CI development should be the main concern of the country’s economic leaders.
The writer is a senior banker and freelance columnist