Human Capital As a “Real” Balance Sheet Asset

For the Caux Round Table (CRT), the “holy grail” of how best to run private enterprises as moral capitalism is including intangible assets – social and human – into the value of the enterprise.  The purpose of the firm, then, expands from earning short-term profits to increasing firm asset appreciation and avoiding the loss of assets.

As the firm seeks to optimize the value of its assets – financial, social, human and in ways not yet fully understood – it acts in a socially responsible fashion.

A major hurdle to overcome is accounting conventions, which do not provide means and methods for pricing social and human capitals and for recognizing them as assets on a balance sheet.

In 2019, an investor advisory committee on human capital made a recommendation to the U.S. Securities and Exchange Commission (SEC) on the new importance of intangible capitals to the asset value of companies as follows:

-Today’s companies are increasingly dependent on their workforces as a source of value creation.  Indeed, for many of the most dynamic companies, human capital is their primary source of value.  As the U.S. transitions from being an economy based almost entirely on industrial production to one that is becoming increasingly based on technology and services, it becomes more and more relevant for our corporate disclosure system to evolve to include disclosure regarding intangible assets, such as intellectual property and human capital. Human capital is increasingly conceptualized as an investable asset.  Modernizing the commission’s framework for corporate reporting generally should reflect these facts, subject to the standard of materiality.

-More specifically, as depicted in figure 1, a 2015 study of the components of S&P market value data found that the implied intangible asset value of the S&P 500 grew to an average 84% by 2015 from the 1970s, when it was less than 20%.  The shift is ongoing and reflects a growth in the importance  of intangibles, such as human capital, of four percentage points over ten years.

In August 2020, the SEC ”modernized” its rule on the disclosure of human capital.  The new regulation requires disclosure of a firm’s human capital resources, including in such description of human capital resources, any human capital measures or objectives that management focuses on in managing the business to the extent such disclosures would be material to an understanding of the firm’s business taken as a whole.

The step towards recognizing the CRT’s focus on intangible assets taken by this decision of the SEC to require a description of a firm’s human capital resources is that it effectively denominates human capital as an “asset” worthy of recognition and appraisal in monetary units by a firm on its balance sheet.

The relevant section of the SEC’s public release giving notice of this new requirement can be found here.