By Nick Shepherd, FCPA
A recent article published by ESM (Engagement Strategies Media) featured an interview on the issue of human capital reporting and the accounting profession with David McCann, Deputy Editor of CFO Publishing, a well known and widely recognized organization whose audience includes many senior financial managers. See: CFO.com Editor: Finance Execs Remain Engagement Skeptics. McCann states that Chief Financial Officers remain skeptical that the impact of human capital and engagement can be measured or should be subject to financial reporting or disclosures. If so, the profession is missing a major opportunity to make itself more relevant in the 21st Century and even to prevent the possible decline of its role in business.
McCann indicated that reporting on human capital, and in particular engagement strategies, is something that holds only “little interest” for CFOs, and they remain wary of additional reporting “burdens.” He notes that there is a level of growing investor interest but was quoted as saying “…CFOs tend to be skeptical of human resource initiatives put forward by a profession he says that has for years tried to get a seat at the executive table. Many CFOs, whether or not they will say it on the record, look at HR as a soft discipline.” It was suggested that further focus on human capital would only occur if it were mandated by the SEC and/or demanded by investors.
This is an interesting perspective and seems to suggest that CFOs remain out of touch with the realities of what is “driving the numbers” in their organizations. Accounting information is already in decline in terms of governance. Over the last 20 years, the value of the financial balance sheet has become less and less representative of the value of the business; income statements can show good results only to later reveal problems in the sustainability of earnings. The latest survey by Ocean Tomo (an intellectual property merchant bank) indicates that balance sheets now only represent 18% of average corporate value. Baruch Lev, the well-known and respected (Philip Bardes) Professor of Accounting and Finance at New York University’s Stern School of Business, in his latest book. The End of Accounting (2016), lays out clearly the declining impact of the accounting profession in corporate governance. The emergence of human capital management, if embraced by the accounting profession, is in fact an opportunity.
The economy has been changing for many years; the U.S. manufacturing sector now only employs 8.8% of the American workforce; the financial service industry’s share of total U.S. profits is now close to 40%; the U.S. Finance and Insurance industry is a larger share of U.S. GDP than durable manufacturing, as are health and social care. Approaches to the management of “the workforce” that were used in the past are no longer viable, because “knowledge workers” have become a critical source of competitive advantage. Even successful manufacturing organizations have changed their approaches to managing the workforce, Toyota often being used as an example of how it engages its people. The recent book, How Google Works, by Eric Schmidt and Jonathan Rosenberg, explains how different principles and styles of leadership were critical for them to learn when they joined Google.
Corporate compliance still drives a core aspect of the reporting role of accountants, but compliance as a principle was never supposed to add value. It’s about just that – “compliance” – and the need to establish some level of control over corporations and their accountability to their shareholders. If accountants continue to focus on compliance, the profession is going to be in decline.
Progressive accountants will embrace the importance of human capital for two key reasons, both of which are strategic and add value to the business. First, accountants employed internally (which interestingly enough is the majority) will be concerned with what is “behind the numbers.” For many organizations today that is human capital – the people who drive competitive advantage through innovation, creativity, building relationships both internally and externally, interpreting data and solving problems. People are often the sources of the intellectual capital that is central to a knowledge-based business, and as such need to be engaged, supported, recognized and rewarded for their efforts. Most of all, managing an effective workforce requires that people be trusted and valued, as this is a core driver of motivation. Accountants who advise and support the internal decision making must be strongly aware of the link between financial decisions and employee motivation – in short, they must know as much about human capital as they know about financial capital.
Secondly, accountants who play a role in public reporting need to recognize that the organizations they’re involved with are working in a media-intensive society where the public is bombarded with news through all media which is often negative about corporate behavior. In addition, the “knowledge society” is increasingly creating a marketplace where organizations are in competition for talent. Both of these factors require corporations to tell a good story about what makes them special – both to balance the negative press and to attract talented individuals making decisions where to work – in their minds “who to partner with.” Sustaining and building an organization’s brand and reputation is an active process, not a passive one. Non-financial public reporting is no longer about compliance – it plays a critical role in ensuring that the value inherent in the business is protected and increased.
If business is relying on accountants to be the drivers of reporting and to only report mandatory financial data, then there is an increasing risk that organizations face a decline in value in the marketplace because no one was paying attention to what was actually creating the value in the first place.
About Nick Shepherd:
Nick Shepherd has an extensive background in corporate finance and more than 40 years of business experience and 30 years of experience as a Certified General Accountant. Since 1989, he has been running his own management consulting and professional development company, EduVision Inc., that provides professional facilitation and management consulting and development services to public and private sector organizations. For more information about Shepherd and his company, go to Eduvision.ca.