Whose agenda is it?

Human capital development, as it relates to culture, can be managed, if the organisational membership is relatively stable. Another important antecedent to human capital development rests with general employee sentiment. Employee sentiment can be defined as the interrelationship between employee satisfaction, commitment and motivation. Edmondson (1996) also argues that leadership is a key antecedent for human capital development.

She claims that it is not enough for leaders to design appropriate organisational structures and continue to make well-reasoned decisions; instead, organisations must be characterised at all levels by a ‘leading attentiveness’ to changing conditions. This task becomes much more difficult when there is a high degree of mobility in the employee base. The continual change in an organisation’s employee profile – also called turnover – is a significant challenge when attempting to leverage human capital.

Analysis of the literature reveals that there is no one single definition to define human capital. This just reveals the problem, which is just the tip of the iceberg. Once we agree on what human capital is, the next challenge is to identify who is responsible for developing it. As mentioned earlier, the onus is on individuals and organisations. If we look at the problem from the perspective of an individual, there are various factors influencing him or her. Individual experience shapes their behaviour, which then influences their attitudes, skills and competencies.

The institutions that individuals attend have a crucial role to play and the government have to constitute the right policies to enhance the quality of education. Objective and critical thinking has to be embedded in the academic stream. Policies have to be constituted to ensure that students are evaluated on their ability to think critically. Government should make these changes by revamping the education laws in the country. Schools must encourage creative thinking. Emphasis has to shift from classroom lecturing to practical applied learning.

Schools in India are embracing this reality, which is paving the way for new hands-on learning sessions. However, students are still evaluated based on their ability to memorise, and this continues to be a significant handicap. Indian school systems are governed by the state board of education or central board of education or ICSE.

Answering the question, ‘How do people add value to an organisation?’ has become increasingly difficult and complex. So too has the corresponding challenge of measuring and reporting upon this issue in a valid and reliable manner. Traditionally, organisations were seen as a collection of physical assets, but the information age has given birth to organisations that are rich in intellectual or knowledge assets that require entirely different skills from their employees (Stewart, 1997). Stewart argues that one of the powerful advantages of information is its ability to wipe out the need for inventory. Hence, information-intensive organisations often have less physical assets but more intangible assets. Therefore, the gap between the book value of companies and their market value has been widening.

An important reflection of this observation that much of the value created by firms is becoming more dependent on assets other than physical capital has been the development of a wide and diverse literature about intangible assets and intellectual capital (Scarborough, 2002). Roos et al. (1997) classify intellectual capital into two facets of structural and human capital, ‘thinking’ and ‘non-thinking’ assets. Employees who add value to the organisation using their skill sets, knowledge and competence are the thinking assets. The tools, processes and systems they create, the infrastructure of the organisation, etc., are the non-thinking assets.

Carson et al. (2004) classify structural capital into fluid capital and crystallised capital. The former is used to indicate the physical capital, such as computers, production lines, etc., and the latter is used to indicate the organisational knowledge of teams and work groups, and they therefore disagree with Roos’ (1997) classification of structural capital as a non-thinking asset. There are different definitions of structural capital, and there are more than ten different ways in which structural capital is classified. Therefore, to some extent, what is defined as constituting structural capital depends on individual views. Some aspects of it may also be considered under the umbrella of human capital. Ultimately, strategic drive towards transaction efficiency and intellectual capital effectiveness will need to merge when more and more commerce becomes knowledge-based.

An organisation is a collection of people, and without human capital, there is no intellectual capital. Human capital is defined as the individual capabilities, knowledge, skills, experience and problem-solving abilities that reside in people in an organisation (OECD, 1996; Dess et al., 1999). Human capital is to a large extent non-standardised, dynamic, context–dependent intangible combination of qualities in people.

The Indian Certificate of Secondary Education (ICSE) examination is conducted by the Council for the Indian School Certificate Examinations, a private, non-governmental board for school education in India, for class 10, i.e. grade 10. It has been designed to provide an examination in a course of general education, in accordance with the recommendations of the New Education Policy 1986 (India), through the medium of English.

While the Central and ICSE boards focus more on coursework and learning by doing, etc., the majority of the students attend the state board education, which favours memorising over application. Although there are private schools, they are governed by one of these three boards.

At the university level, the problem gets more complicated. Although universities have a vital role to play in talent management, they seldom do anything to impart critical thinking in their students and help them establish transferable skills. In India, each university could have several colleges offering different courses for students. Although these universities are guided by the central government and HRD ministry, their output is not objectively measured. For example, there are no criteria or standards to evaluate and rate the quality of the candidates graduating from them. Unlike the UK and the US, where the educational institutions receive an appraisal, Indian universities and schools are not ranked. Most of these universities do not have a career management office nor do they invest in training students for the challenges at work. In most colleges, a group of students take up the responsibility of coordinating with organisations for scheduling campus interviews for final-year students. The universities have devolved the task of providing that service to these groups.

The government or an independent body has to come up with an objective method of evaluating these institutions based on the quality of education, return on investment, quality of research, employability of students, etc. Such a system can indirectly put pressure on institutions to improve. However, change will occur only in the long term. Given that this scenario will take some time to change, the burden naturally shifts to the corporate world to manage human capital.

Given the sophistication of modern management techniques, it seems curious to observe that there should still be a question-mark over the ability of managers adequately to understand, value and deploy what so many experts agree is one of their principal sources of competitive advantage, namely their people (Scarborough et al., 2003). The current lack of clarity in terms of what is to be excluded or included in practice demarcates what managers deem to be relevant and what they do not. This demarcation reveals a number of prominent underlying assumptions.

At the organisational level, there are two fundamental problems. The first one pertains to the role of the HR department with respect to the organisation’s objectives. The second problem is the capabilities of the HR personnel who are responsible for identifying, recruiting and nurturing talent.

Viewing employees as a resource has led to the resource-based view of the firm. The influence of human capital (HC) on firm performance led to the development of the strategic perspective of HC. Although the importance of fitting a firm’s personnel/HRM policies and practices to the firm’s overall business strategy has been recognised since the dawn of the field (Kaufman, 2001b), this idea only became widespread among academics and practitioners in the last two decades (Wright et al., 1992). However, in fact, remarkably few organisations have given HR its due merit. Even in the West, most of the companies relegate HR to a supporting function. Even in India, only the successful and progressive companies have given HR its due credit. It is the same story of the West that gets repeated in India as far as HR recognition is concerned. Analysing why this is happening brings the discussion back to only one point: quantification. The reason why most companies in India or in the West have not given HR its due credit is because of the intangible nature of the value HR departments add. In a measurement obsessed world, functions like finance and operations can comfortably quantify the value they create or add, unlike HR. Most leaders in these organisations therefore view HR contribution as ‘soft, intangible and fluffy’. Therefore they are not willing to recognise the value of HR departments.

The main challenge faced by HR is quantifying the value employees add through their roles. Traditionally, HR does not adopt a quantitative approach to assess the value of their employees and the value of their initiatives. They believe that they would not be able to support the metrics (criteria) they develop. HR accounting did attempt to determine the value of employees over their lifetime but it has been clearly demonstrated that it is difficult to maintain sheer numbers alone. The measurement scale has to be objective where possible and proportionate in case of intangible metrics.

The increasingly competitive global economy pushes firms to exploit all their available resources as a means of achieving competitive advantage. In that light, the HR department or HC of the organisation is no exception. A lot of work has been done on the link between HR practices and organisational performance. Work that has primarily been done in the HR dimension has always been in an effort to assess whether HR practices have an impact on organisational performance. Studies have demonstrated a variance where results vary from strong correlation to mild or weaker correlation of a limited coexistence between practices.

While other fields, such as economics, have tried to clarify the link between practices and performance, they have been able to offer only a broad explanation as to why certain HR practices exist. The grey area between HR practices and firm performance challenges academics and practitioners to assess and explicate the exact mechanism which plays a role in HR practices. While models tend to show linear cause and effect scenarios, in reality they are nonlinear. The issue is in determining how many boxes are to be included before the model is complete.

Huselid (2005) suggests that for HR metrics to be effective it should measure relevant things pertaining to business and be able to provide a causal relationship and new modes of analysis. He states that strategic performance measurement is based on the relationship between human capital and unique strategic motivators in the organisation. Therefore, neither traditional benchmarking like efficiency measures, nor constructing measures like human capital value are enough to capture the value generated by HC. He strongly advocates the need to have new measures that help drive the strategy of organisations than rather a one-size-fits-all measure.

In light of the above discussions, it is quite obvious that the problem of HC management is much more complex than envisaged. If the organisation is a collection of people, strategy is nothing but a combined response of a group of individuals to an opportunity, problem or situation. That is nothing but the collective behaviour of people. In that case, HR has to be involved in every employee’s and every department’s planning. Managing human capital is, therefore, not the sole responsibility of HR personnel but the shared responsibility of the organisation.

Most of the senior managers who were interviewed acknowledged that HR and strategy have to coexist. However, they also mentioned that it will take a while for that to happen as HR people are not yet equipped sufficiently. If that assertion is true, HR managers have to undergo urgent further training.

Ill-equipped or unprepared?

Strategy refers to a plan of action designed to achieve a particular goal. The word is of military origin, deriving from the Greek word ‘strategos’, where ‘stratos’ means ‘army’ and ‘ago’ means ‘moving’. Strategy could primarily be classified into six main categories: process, financial, employees, shareholder/stakeholder, customer and habituation. Customer strategies embrace sales, marketing, communication, etc.; shareholder/ stakeholder strategies include quality assurance, corporate governance, risk management, shareholder returns, etc., and habituation is the policies and practices in place in an organisation.

For any strategy to become effective there are two aspects: a military metaphor provides a basic outline. Generals (the C suite executives) devise effective strategies, while Lieutenant Colonels (senior managers) and Majors (middle managers) devise the tactics. Captains (front-line managers) implement the plans and soldiers (individual employees) in companies and platoons deliver the results.

Alignment aspect: a general devises what he believes to be an effective strategy and communicates the required aims and objectives clearly and concisely. Some of the subordinates (of different ranks) do not believe that the strategy will work. As soldiers, they obey their commanding officer (CO) and follow orders to implement the strategy as devised, but they do not succeed in achieving their end objectives. The reasons: they were not convinced that the strategy was suitable or, more likely, they did not believe in the end objectives in their hearts. Their minds accepted the orders and implemented them, but at the heart (values) level, they were not convinced. Hearts (values) and minds (strategies) have to be aligned to ensure lasting success. To effect lasting change in business, the managing director (MD) and senior management must be aligned in terms of end objectives and strategies to be implemented.

Action aspect: soldiers who have little or no trust in their superior officers do not fight to ‘win’ (i.e. achieve the objectives); they fight to ‘survive’ for another day. To win a war (not a battle), all of the officers and men have to believe in the aims. Effective strategies + commitment + training (skills) = lasting success. The staff must have confidence in the team leaders and managers to implement the strategy. The action aspect is about demonstrating requisite behaviours to ensure successful implementation of the strategy. This includes the key components, training, skills and competence.

There are two primary reasons why C suite executives do not succeed in transforming effective strategies into ‘reality’. The first reason is that the leader might not take steps to identify areas of nonalignment. All too easily, leaders accept a verbal commitment regarding the proposed strategy. Analyses clearly reveal any areas of nonalignment and, when significant, it is a valuable opportunity to examine and, if appropriate, modify the strategy to ensure full commitment.

The second reason applies to those executives charged with tactical responsibility for the implementation of the strategy. Too many ‘tacticians’ do not understand that attitude is much more valuable than skill or competence in terms of strategy implementation. Leaders can train staff (with positive attitudes) to develop and apply the requisite skills to implement the strategy and deliver the required results. What about staff with negative or resistant attitudes? Answer: they are a drag on the business and they will continue to be until a decision is taken to effect remedial action. Tactical managers must decide whether or not to spend the time, money and effort needed to change their attitudes or to dismiss them.

On the surface, the previous statement seems harsh and insensitive, but as soon as the link is made with ‘values’ a clearer perspective emerges. What is the key criterion (value) regarding recruitment and development of staff? If the key criterion is not to hire people with negative attitudes and the business conducts regular behavioural profiling to identify any negative attitudes before serious contamination takes root, then the statement is not insensitive; it is exceedingly practical. Businesses are ‘in business’ to make a fair profit. Businesses that hire and/or retain individuals with negative attitudes will eventually go out of business. An organisation has to ‘dig up the weeds’ (nonaligned values), then ‘plant the seeds’ (future expectations), ‘water the roots’ (ongoing commitment) and ‘harvest the fruits’ (implement the strategy).

If an organisation is a collection of individuals, then how individuals behave will influence the organisation’s behaviour or culture. Individual behaviour can have a profound impact on an organisation when individuals are in leadership positions. Behaviour is a response to a situation or scenario which is more biological, which means a response to any situation or problem is centred in the brain. The response is generated by active learning and by altering perceptions.

In an organisation like Apple or Microsoft, Steve Jobs or Bill Gates influences their company’s behaviour. If the organisations do not have an iconic leader, then the collective behaviour of the leadership team will influence the way the organisation behaves. Studies have revealed that any organisation absorbs some of the conduct of the founders and imbibes it as part of its culture. For example, there is ‘The HP’ way of doing things or ‘P&G’s focus’ on problem-solving. However, organisations cannot succeed if the employees do not behave the way the organisation wants or expects them to.

Behaviour is a response to a scenario at a point in time in specific circumstances. In reality, an organisation is a collection of people. Strategy is nothing but the collective behaviour of the organisation in response to a problem, situation or opportunity. The collective behaviour or organisation is influenced by the individual and collective behaviour of employees. Is not strategy, therefore, rather a response to a stimulus than a well thought out process? Is that not HR?

Management consultants can come up with, or help leaders to come up with strategy but cannot predict whether the strategy can be implemented successfully. Even if they can identify problems, they cannot specifically identify people and processes that can cause the strategy to fail. The reason for the lack of understanding stems from the fact that the frameworks and tools used by consultants or industry are two–dimensional. As human beings, we do not think and operate in two dimensions, but in three. Using a two-dimensional framework for a three-dimensional problem will always have elements of uncertainty as it can provide only a surface-level view and it lacks the necessary depth.

This reveals that organisations are using measures that are compromised to start with. If one were to overcome that difficulty, there then follows the challenge of linking people and strategy, as these are the two key influences that help organisations to become successful.

There are very few organisations that have the ability to look at the problem at hand, incorporating a multi-dimensional perspective.

All along, HR personnel have been blamed for having a lack of business understanding, and they have also been branded a necessary evil by some leaders. In reality, the complexity of the problem they face taxes even the most brilliant minds. The ability to link behaviour and strategy has to start from the top and HR personnel alone cannot be blamed for an organisation’s inability to develop its human capital. Yes, studies have shown that HR personnel need to have a rounded exposure of the business. HR personnel should move from a process to a strategic orientation. Even leaders who were interviewed acknowledged the difficulty in understanding the complex relationship between human capital and elements of strategy. However, this discussion clearly highlights that training HR personnel alone is not enough. They are ill–equipped rather than unprepared most of the time.

Why should it be everyone’s agenda?

In reality, although all the work that is done involves expertise, when it comes to the responsibility of managing that talent, attention shifts to the HR department. The senior executives are more interested in strategy and direct any questions about employees to HR personnel. In the minds of the C suite executives, people or behaviour is only the responsibility of HR. In the knowledge economy, employees are the principal source of value. They use the structural capital in the organisation to generate intellectual capital. Although HR departments are capable of generating value in various aspects, this discussion will look at the aspect of performance measurement to determine why HR is not the agenda of HR departments alone. As Lord Kelvin (Scarborough, 2002) once said, ‘what cannot be measured cannot be managed’. Many have attempted to determine the value of organisations’ intangible assets. Human capital has been by far the most difficult to measure and presents more challenges.

An organisation’s growth and profitability are the result of the contribution of employees which is captured by HR frameworks. However, Huselid (2005) suggests an HR framework should evaluate relevant factors pertaining to business and should be able to provide a causal relationship and new modes of analysis. He states that strategic performance measurement is based on the relationship between human capital and unique strategic drivers in the organisation. This approach to human capital chimes with the emphasis given in strategy research to core competencies, where economic rents are attributed to people-embodied skills (Hamel and Prahalad, 1994). The increasing importance of the resource-based view of a firm has done much to promote HRM in general and attention to human capital in particular, and to bring about a convergence between the fields of strategy and HRM (Wright et al., 2001).

The question of what contributes to a firm’s competitive advantage has seen a shift in emphasis away from consideration of the external positioning in the industry and the relative balance of competitive forces, towards an acknowledgement that internal resources may be viewed as essential to sustained effectiveness (Wright et al., 2001). Frameworks for the measurement of human capital that have developed within the strategic management domain can be divided into two categories (Brennan, 2000):

The best-known classifying framework is the balanced scorecard (BSC). This was developed by Kaplan and Norton (1992). The framework wants managers to look at four main areas, namely the internal financial business process, learning, growth and customer, and link each area to the core strategies of the organisation. Linking each area to the core strategies of the organisation and having metrics to measure each area align all these areas and help to measure strategy effectiveness to deliver results. Learning and growth are concerned with HC issues and try to align them with the organisation’s strategic objectives. BSC technically measures parameters in line with business needs, hence, more focus is given to the customer dimension.

However, from a human capital perspective, the scorecard has the following limitations. The score card is externally focused on shareholders and customers. Although internal focus is provided through learning and growth, it is not enough to address all the soft issues pertaining to employees. Apart from competencies that are measured, there are various behavioural elements that influence the employee’s engagement to the organisation which ultimately determines the value they add (Sureshchander et al., 2005). The scorecard also ignores the responsibility of an organisation to society through its employees and the value it brings. In fact, the criticality of societal issues has been accentuated in the total quality management literature as well for some time now (Sureshchandar et al., 2001a, b).

The HR scorecard was developed byBecker Huselid and Ulrich (2001). Based on the BSC approach, it attempts to align human resource value measurement to strategy implementation. Although there are lots of classifying frameworks, they focus on the human angle, using past information to achieve a certain objective. This does not provide any evaluation of the individual or the collective value of human capital to the enterprise.

Managing frameworks, such as the SKANDIA framework (Skandia, 1998) are used to manage intellectual assets to maximise their value, adding potential to the organisation. Although this framework is used to report the value of employees, the framework is not without limitations. Firstly, this navigator in particular uses a net present value (NPV) method of valuing people, the disadvantage of which will be discussed in the next section. Secondly, to measure the human potential value, the navigator uses the highest value added per employee and multiplies it by the number of employees. This method once again gives the average value that can be generated and not the actual value of the employee. Another fundamental problem with this approach is that the framework assumes that the difference between market value and book value is the value of the intangibles, which needs not be the case, and fluctuation in share price can distort the value of intangibles.

Viewing employees as assets violates traditional accounting methods. Investment in human capital has so far been regarded as a cost and investment in people is still seen as a cost by accountants and is purely market driven. Accounting and measurement practices have developed to support a system which has been labour–and capital-intensive. Deeply embedded in this system is the view that what matters is the efficiency with which capital is deployed. The money that enterprises spend on HR has been and is still seen as a liability by accountants rather than as an investment (Roselender, 1997; Johanson, 1998). At this juncture, there is no standard framework or guidelines for reporting. Traditional accounting measures are not adequate to measure the value of human/intellectual capital and have found it increasingly difficult to explain the gap between companies’ book and market values (Allee, 1999; Stewart, 1997).

In knowledge-intensive economies, investment in information has exceeded investment in physical assets. This can be observed by the fact that knowledge-intensive organisations spend more than 40 per cent of their earnings on people and related expenses. Traditional accounting practice does not provide for the identification and measurement of these new intangibles in organisations. The limitations of the existing financial reporting system for capital markets and other stakeholders have motivated an evolving dialogue on finding new ways to measure and report on a company’s intangible resources. Attempts have been made from the financial perspective to address this issue, and HRA has gained currency.

Human resource accounting attempted to look at this from a different perspective. Some early accounting theorists advocated treating people as assets and accounting for their value. Psychologists like Likert (1967) were concerned with the human resources perspective based on the premise that people were valuable organisational resources. Hermansson (1964) in the early 1960s described a model to measure human resource value (Flamholtz et al., 2002). HR accounting tries to provide:

Flamholtz (2002) developed a model to calculate the individual’s value in an organisation based on the services that are expected to be rendered to the organisation in future roles and service. An individual’s conditional value, consisting of promotability, productivity and transferability, was considered in combination with the probability of individuals occupying various service levels. Flamholtz describes the HR paradigm in terms of psycho-technical systems, which holds that there are two functions of measurement:

However, from the perspectives of some scholars and practising professionals, people do not fit the financial definition of assets (Mayo, 2004) as an ‘asset’ must generate a future income stream and be owned (controlled) by the organisation.

Alternative valuation bases for human capital were also propagated. Likert (1967) suggested using replacement cost as an alternative way to value human capital. Flamholtz pointed out that it is easier to estimate replacement cost than market value. Alternatively, some researchers proposed a valuation model by reckoning with the probability of death. This approach, however, gives a general value rather than an individual value. Growing sophistication of business information requirements enhances the need to consider the appropriateness of the presentation. Creditors, therefore, favour conservatism, ignoring the intangible assets as not saleable per se (Baker et al., 1974). Traditional measurements have been used to compare investments within and between companies, but in the case of human capital reporting, there are no standard measures by which organisations can compare assets. In short, organisations are not able to benchmark their intangible assets in relation to each other.

Although HRA focuses on reporting human capital for the external world, it has its calculation based on various assumptions, and as a result, has limitations in representing human capital. HRA, as a result, presents a singularly general picture concerning valuation of human capital. With hindsight, however, like much of the management accounting developed in the 1970s, human resource accounting remained imprisoned within the paradigm underpinning financial accounting and reporting. The information it provides, the models that underpin it, and the timeframes it embraces are all commensurate with the prevailing financial mindset of periodic reporting, short-termism and a ‘hard’ accounting calculus (Roselender et al., 2001).

Cascio (2000) suggests that human asset approaches are insufficient because they focus only on investments in people, which according to him, are inputs, and ignores the outputs the resource produces or is capable of producing. He, therefore, does not advocate the asset approach used by HRA. On the other hand, Boudreau (1997) feels that proper measurement of human capital has been difficult as the focus is too much on the financial measurement and that not much emphasis is put on the ultimate purpose of why it has to be measured. He wants to study the effect that the current quality of information has on management decisions, hoping that these studies might improve the measures (Boudreau and Ramstad, 1997). Lev (2001) is clear that the HR asset valuation problem has not been solved. Even Flamholtz (2005) acknowledges that the field of human resource accounting has neglected one aspect of the economic value of human capital. This is the value of what Likert (1967)once termed ‘the human organisation as a whole’ rather than the value of individuals per se.

Hence, HRA cannot be used to measure the net value generated by humans. Moreover, influences of factors like trust, identity, motivation, leadership, etc. are not reflected in HRA measurement, thereby limiting indicator validity. Hence, researchers have called for alternative forms of accounting human capital, moving away from the costing perspective.

An alternative method suggested was to use discounted cash flow (DCF) calculations to estimate the present value (PV) of future income. Accountants assign a discount rate to calculate the net present value (NPV) of any investment made in a development or training activity.

However, a significant hurdle in using the NPV is to address what discount rate is to be used to calculate the value of the individual. Even if one were successful in assigning a discount rate for one person, it certainly cannot be applied to all employees. Moreover, assuming that we use a discount rate that is assumed to be constant over a period of time, even then the NPV calculation only reveals the salary of the individual and does not indicate their true value.

An option is a contract to buy or sell a specific financial product officially. The organisation has the right, but not the obligation, to undertake some business decision, typically to make a capital investment. When they decide to buy or sell it is called exercising an option. The present value of the expected cash flow on these investments will understate their true value (Howell, 2001). Increasingly, intellectual capital such as patents, copyrights, brand names and know-how is viewed as options allowing companies to grow and respond to changing business environments in the same way in which financial options enable investors to respond to changing economic and financial environments. Real options could also be used to value the justification of investment in an individual for training. The problem in taking this approach is that the ambiguity over rate of return and risk-free rates dilutes the validity of the option–pricing model. Options are used to value a call or a put for one specific decision and not for the value of human beings on the whole. (A Put is the name of the option which gives the owner the right to sell the option.)

At the moment, academic literature is limited, and there are difficulties even in reporting goodwill in financial and accounting statements. Hence, to be successful in accounting for human or intellectual capital one should not rely on models of accounting (Roselender et al., 2001). William Petty (seventeenth century) was the first economist we know who emphasised labour quality differences and who identified what much later was labelled ‘human capital’, when he argued for an inclusion of the ‘value of workers’ in accounting for wealth for actuarial purposes. In The Wealth of Nations, Adam Smith (1776) wrote at length on the incidence of workers’ and employees’ knowledge and skills in the production process and the quality of output.

The field of economics looks at labour from the angle of productivity based on factors such as experience, age, etc. To understand how it affects future income, it becomes imperative to look at this dimension, and the contributions that have been made in this dimension to measure human capital. Intellectual capital has six main characteristics that differentiate it from other assets – network effects, no rivalry and high inherent risk, complete in appropriability, non-tradability and economic rent. No rivalry in economic terms means nil opportunity cost and in terms of production is seen as a sunk cost with low marginal cost to reproduce.

Irving Fisher’s capital theory came to constitute the founding base of modern human capital theory as it emerged in the second half of the twentieth century. ‘A stock of wealth existing at an instant of time is called capital. A flow of services through a period of time is called income’ (Fisher, 1906). His definition of income and capital was ‘all-inclusive’, and Fisher thus cut through many controversies among capital theorists at that time on the nature of capital goods as to materiality, monetary aspects, durability or repeatability of use. He emphasised that all types of stocks would be capital when yielding services, and this even explicitly included human beings.

Personnel economics is the use of economics to understand the internal workings of firms (Lazear, 1999, 2000). Compared with other approaches to human resources in a firm, personnel economics focuses on equilibrium concepts that allow for the derivation of predictions about actual decisions of employers and employees, and, finally, emphasises the search for efficiency (Lazear, 2000). It is, therefore, possible to obtain precise and concise recommendations on how to develop human resources management and is not just a straightforward collection of abstract models lacking any basis in reality.

Economics also looks at the multi-dimensional nature of intellectual capital, which is stronger and distinct from other types of capital. From our earlier discussions, we can see that intellectual capital is generated by a combination of human, structural and social capital elements. For all these elements to work together and generate value, there has to be a minimum threshold or input that has to come from all these elements. If one element fails to achieve its level or threshold, it will affect all other elements and the value of intellectual capital generated, as a result. This implies that investors must possess intellectual capital in quantities and qualities surpassing certain thresholds to be productive. Human capital theory can be modified to constitute a solid platform for developing a conceptual assessment method for the individual’s potential (Nerdrum, 2001).

Nerdrum (2001) also found that contrary to the law of diminishing returns, intellectual capital assets grew further when propagated. Schemes for valuing human capital have assumed a single principal agent relationship between the employer and employee, where the relationship is assumed to be under the influence of these two parties (Thompson, 1999).

Economic value added (EVA) is the financial performance measure that comes closer than any other metric to capturing the true economic profit of an enterprise and that emphasises shareholder value. EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true ‘economic’ profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk. In the case of EVA, academics argue that EVA is only a variation of residual income and internal rate of return, developed in the 1950s and 1960s. Another significant disagreement is present in the empirical studies conducted for determining the relevance of the method for the stock return valuation. While previous research has reported a high correlation among EVA and stock returns, more recent studies report that EVA is less reliable than the operating income and the residual income in stock valuation processes (Yeniyurt, 2003).

Game theory is one of the lenses through which economists view the issue of human value. A game is a situation in which intelligent decisions are necessarily interdependent. A strategy is a game plan describing how each player will act or move in every conceivable situation. Equilibrium occurs when the player chooses the best strategy when given the strategies being followed by other players. This equilibrium is called Nash equilibrium (Begg et al., 1997). Organisations apply this theory to predict the moves of their rivals to determine their own action.

In the game theory approach, we see that value generated depends on the assumption based on rational and precise knowledge and identifies individual bargaining capacity but not a value for human capital. Although economists have been able to value the relative importance of people using game theory, they found the initial cost to gain the asset to be high and the cost of replication marginal. In general, the role of soft factors is ignored. Using game theory, the hidden value of an asset may be uncovered, which is nothing but the deterrence value of the investment in intellectual capital. The value added by the firm will be equal to the sum of the contribution of the workforce and the contribution of management and owners, with a split in compensation determined by bargaining between the workforce and management. This bargaining game can be modelled using game theory (Chen, 2003).

Economists have also suggested using signalling theory to value human capital. Using this, it is possible to determine how the employee has increased the efficiency of the process above and beyond the investment required for training and enabling them to perform their tasks.

To summarise, the approach provided by economics is useful, based on the assumption of perfect information (ceteris paribus clauses). Economics also assumes rational behaviour in people and markets, which seldom applies in reality. Moreover, if individuals do not see themselves as part of the group or organisation then they do not create value. Social identity theory, which should play a vital role, has not been given its due.

We can conclude that human capital is the core asset that helps organisations develop a distinct competitive advantage. They do that by using the structural capital resources of the organisation such as process, structure, etc. The knowledge thus created, be it tacit or explicit, resides in the structure or human capital. Human capital directly or indirectly influences firm performances, engaging in different inter–and intraorganisation relationships and using various resources of the organisation to create value.

The HR area has different frameworks that attempt to assess the soft factors. We see that there are frameworks like the HR scorecard that attempt to connect HR measures to strategy to produce a clearer picture. Similarly, the human capital index (HCI) links social identity theory with soft measures, which are linked to the economics dimension through the principal agent theory. In economics, we see that work has been done using game theory, EVA, to value human capital contribution.

EVA also provides a link between economics and finance dimensions as well as a link between finance, strategy and economics. However, we also see the limitations that exist in the approach as each dimension looks at the human capital measurement from a singular perspective whereas the massive nature of the construct requires a multi-dimensional approach to the problem.

Bonits (2002) says that for leaders to manage the dynamic changes of unstable economic environments, an integrated view of human capital management plays a prominent role. The discussion so far has revealed human capital management at its root. However, the extant literature has yet to incorporate the appropriate fields of literature to uncover the hidden meaning. We have seen that constructs from strategy, accounting, HR, economics, social capital, organisational behaviour and knowledge management need to be integrated to reveal a more holistic view of organisational performance.

This analysis clearly indicates that no single area exists that caters for the measurement of human capital in organisations. There are various factors that cut across the academic fields of strategy, accounting, HR, knowledge management (KM) and economics. However, approaches to the measurement of human value tend to focus on metrics that have been developed in these different ‘silos’. The metrics that have been developed also tend to ignore the impact of human behaviour and attitudes, social networks, the importance of tacit knowledge transfer, social capital, the role of individual and group identity and macro-societal and environmental concerns. It is clear that, even from the point of view of measurement, both academic and practitioner perspectives reveal the complexity of HR and the need to adopt a multi-dimensional perspective. This clearly demonstrates that the agenda for people management should be at the board level and not the sole responsibility of the HR personnel.

Earn respect

In today’s world, talent is a precious commodity where demand far exceeds supply. The economy is moving from a manufacturing to a knowledge economy. In that context companies are finding it increasingly difficult to source talent and more difficult to retain it. In addition to that a new generation has entered the workforce: Generation Y, who are extremely ambitious, demanding and connected. Managers are finding it difficult to handle this workforce. In the current context, organisations have to think and rethink seriously about the talent pool they have and also about how they should/could cultivate talent within to ensure a steady supply of talent. It becomes all the more important to retain talent.

For that to happen, HR has to be seen more as a strategic function than as a supporting function. So HR has to improve its methods and earn respect. A study by Mercer clearly states that HR managers want to move up the value chain but feel that they are not equipped to handle the responsibility because of lack of exposure/experience. For HR managers to move upstream, they should objectively analyse the current situation of HR in their organisation and what needs to be done to move away from a traditional processing approach to a strategic one.

Many HR managers want to move from a process to a strategic stream. Many studies have shown that, although there is some progress, a lot needs to be done to alter thinking. To do that, HR should become a boardroom agenda and HR managers should demonstrate the reasons why it should be a top priority amongst leaders.

Managers need to objectively analyse the value their function or department adds/creates/protects. The objective of this introspection should result in HR managers gaining an insight into what could be outsourced or centralised, and what is really strategic.

Recruitment is an important function, where HR managers can add immense value. However, it is very rarely viewed with respect or taken seriously. The inability of HR managers to quantify the value of their recruitment initiatives creates a major setback when it comes to creating a case study for driven leadership.

If HR managers can start adding value by talking the number language, their opinions would start carrying more weight. By creating benchmarks and milestones, HR managers can transfer recruitment initiatives from a process to a strategic focus. For example, they evaluate how employees fit into an organisation from a role and cultural perspective. ‘Fit for a role’ is based on the employee’s ability to do the job; the cultural perspective evaluates the ability to adapt to the organisation’s culture and other team members.

Talent management is an area that would help HR managers become more strategic. By understanding the business vision, mission and the strategies needed to get there, HR managers could evaluate their existing talent pool and identify ‘stars’, ‘angels’, ‘guardians’ and ‘foot soldiers’. Organisations lose a lot of revenue due to business disruption caused by manpower shortage. If HR managers can quantify the damage occurring due to talent shortage and then demonstrate how their talent management strategy can prevent a shortfall, they will naturally earn respect.

Last but not least, many HR initiatives fail because HR managers are not able to quantify the value of the training interventions. Many HR managers are trained to be more qualitative than quantitative. It is not easy to create a business case if the person is not able or does not have the ability and/or training to look at the impact of any talent management initiative on the business. Companies and educational institutions have to start offering programmes that would help these managers master that skill. By shifting the emphasis onto statistics and by focusing on using those insights for HR interventions, HR will become more strategic.

Although many chief executives are increasingly realising the value of people power, very few have made it a boardroom agenda. In India, very few chief executives want to take HR under the portfolio which receives their direct attention. They view strategy conceptualisation as their primary role and rely on HR directors and departments to help identify the right talent.

Unfortunately, the majority of HR departments are still process-driven and operate at the emotional level. Only a handful of HR directors and managers are able to shift from that state to adopting a holistic perspective. These managers are able to see the link between strategy and behaviour and have articulated the need to view people power more seriously. They have realised that every successful strategy is driven only by people power.

They are clear that any value an organisation generates requires people intervention at some stage and the responsibility to recruit and enhance people power. They have as a result obtained the support of the board and have successfully fused talent with strategic intent. Mr Arvind Agarwal of the RPG group has taken it a step further and introduced measures to link the value generated by employees through their role to help organisations achieve the strategic intent. In the case of a computer manufacturing firm, the head of HR has helped to develop an HR recruitment process using online tools for entry-level candidates. The system evaluates the technical and programming skills and competencies online and the candidate gets an appointment letter within an hour by e-mail if found suitable. An increasing number of HR managers are using online channels to share their experience and benefit the industry as their well as commercial experience. HR LinkedIn is a forum which has close to 40,000 registered users from the HR community. This forum is primarily used by budding HR managers to share their experiences and seek guidance. Trainers forum is another prominent online forum which has more than 20,000 registered members. Unlike the HR LinkedIn forum this forum focuses on trainers, mentor and corporate coaches and has more experienced people as part of the group. This forum is run by senior HR professionals purely from the perspective of sharing knowledge.

Many HR managers and directors who were interviewed had immense industry experience, a trend that is on the rise. They have either worked in marketing, sales, operations and in some cases run their own organisations before moving into the HR role. This breed of HR managers is therefore more commercially aware. This has helped HR managers understand the requirements of the business and then create and provide the right talent from a strategic perspective.

Analysis of FTSE 250 companies reveals that of the top 250 companies only three have representation from HR at the board level. This clearly shows that it is a global problem. However, in RPG, Mr Arvind is part of the board, and talent management is a boardroom agenda. It is no surprise to note that organisations like RPG deliver effectively as employees are engaged and aligned and are clear on the value they add. Many MBA students have started opting for HR roles as opposed to a banking or marketing role.

In an interconnected economy, India can play a key role to cultivate new HR talent. However, the road ahead is riddled with challenges. Respect and recognition can only be earned if HR directors/managers demonstrate an understanding and ability to link people power with strategic intent.