The Human Investment

Nate Young, Education Coordinator, Brightworksby Nate Young

Education Coordinator

The most valuable assets of a 20th-century company were its production equipment. The most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity.

– Peter Drucker 1999

No company can succeed without investing in its most important assets. Yet the challenge, as Peter Drucker points out, is recognizing what’s most important. Many modern organizations hold a vast network of “human resources” that are in essence dying on the vine due to a lack of ongoing investment, especially in the area of sustainability training and development. Fortunately, as leading companies are demonstrating, engaging and investing in employees isn’t a charitable effort – it pays dividends of higher company profits and more effective sustainability programs.

Accounting for human resources

To hear Paul Herman of HIP Investor tell it, many companies avoid investing in their employees on a regular basis – possibly due, in part, to a limitation in U.S. accounting standards. You see, employees are not considered an asset, according to the Generally Accepted Accounting Principles (GAAP), the standards by which American corporations develop their financial statements. Employees only show up as salary costs (Expenses on the Income Statement) and possibly as pension costs (Liabilities on the Balance Sheet).

The GAAP requirements can be overcome (Infosys, for instance reports their human resource valuation each year), but these structures tend to reinforce management’s 20th Century views of what are “investments or assets” versus “expenses or liabilities.” Like me, you’ve probably heard the phrase “our employees are our greatest asset” more than a few times. Even if we can’t show it properly on financial statements, why don’t we act like we mean it? Clearly, investing in infrastructure is believed to pay benefits, so why don’t we feel the same about our employees?

Our employees are our greatest asset

The people have spoken…via google search.

What to invest when you’re investing

But, you might ask, doesn’t treating employees as assets add costs (expenses)? To some extent, yes. But research also shows the additional costs are worth it, even based on strict value-creation. For example, Fortune analyzed the stock returns of their “100 Best Companies to Work For” from 1998 to 2010. They found a portfolio of the public companies on the list (reconfigured each year to match any changes) outperformed the S&P 500 by a cumulative return of 291% to 63%. Happy employees, in other words, are also highly profitable!

There is also a clear connection between broader employee engagement and sustainability – this 2010 Hewitt Associates study found employee perception of their firm’s stance on sustainability positively correlated to their level of engagement. And it has been clearly proven that more engaged employees are also more productive and innovative when they are engaged in their work. (Karen Dam does a nice job expanding on this idea over at TriplePundit.)

Whether or not you can quantify the short-term ROI of training programs, sustainability is growing in long-term importance for the modern firm. Adam Werbach, Chief Sustainability Officer at Saatchi & Saatchi put it this way:

Sustainability in a business context means long-term profitability. It is not just about being green or saving the planet: it is about enabling men and women within an organization to create a new business strategy framework attuned to the world around them, one that is flexible enough to respond to change and focused on the long view…One benefit of sustainability [training] programs is that they create horizontal and vertical information flows, connecting employees across function and building social relationships that allow new collaborations to occur.

Aside from the growing market pressure to do business “sustainably,” firms can create an environment more conducive to beneficial innovation. This is only possible, however, when employees are given the tools and training necessary to move forward rather than remain mired in the old way of doing things.

In Microsoft’s recently released white paper, Becoming Carbon Neutral: How Microsoft is becoming lean, green and accountable, they also recognize the value of having employees on board: “To successfully establish a culture of environmentally sustainable operations and achieve our commitment to carbon neutrality, it is critical that we have the support and participation of our employees.”

In order to ensure such support, they have established a number of initiatives, including “MS Green,” and an internal community group tasked with “increasing the environmental awareness of employees and educating them about programs such as mass transit, energy conservation, organic farming, and other local resources.”

The investment/return relationships between companies and their employees are reciprocal: “Employee engagement” means creating a dialog where the company is seen investing in the staff, which in turn invests back in the company, creating value for both. In the end we almost all work for companies where the people – as “intangible assets” – are the principal drivers for corporate value. The question is whether our firms operate accordingly.

How is your organization maximizing its return on investment in ”we the people”?

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