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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.

CEOs Speaking Out and the Ethics of Moral Capitalism

In the current cultural turmoil in the U.S., Big Tech companies such as Facebook, Twitter, Amazon and Google take political positions by censoring opinion and speakers they don’t like. Many advocates of good causes press companies to sway public opinion or adopt new norms with respect to remediation of global warming or compensation for past discrimination based on race.

The issue of when corporate social responsibility would encourage political engagement by companies is most relevant to democracies where rights of free speech, the rule of law and free markets are the reality. In one party or other authoritarian states where control of private lives by the government is the norm, companies do as they are told, not as they might like. In such states, what can’t be helped must be endured, as the recent experience of Alibaba and Ant Financial in China has demonstrated.

The Caux Round Table, many years ago now, made a distinction between corporate social responsibility, on the one hand, and the responsibilities of governments and civil society, on the other. The ethics of competency and “sphere sovereignty” constrain the power of companies to dictate politics, as they see fit to do.

But there currently is little discussion of what the ethics of companies, especially publicly held corporations, should be when the responsibility of companies, as citizens, is under discussion and open to critique.

As James Madison reminded us: “If we were angels, there would be no need for government.” Corporate social responsibility, likewise, cannot presume that companies are always on the side of the angels. Some degree of circumspection is therefore wise.

In a related essay ascribed to either Madison or Alexander Hamilton, the point was made that “as there is a degree of depravity in humanity, which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence.” When companies and their executives presume to lecture and admonish citizens as to what is right and what is wrong, should their recommendations be received with mistrust or with esteem and confidence?

A commentary, which you may read here, proposes some preliminary interpretations of the premises of moral capitalism for the social responsibilities of companies in democratic discourse.

I welcome your comments on what should be expected from enterprise in the evolution of culture and in the power struggles of our political factions for the right to legislate their preferences.

New Times, New Rules: Journalism as Entertainment

Former U.S. Congressman Barney Frank (co-author of the Dodd Frank legislation adopted after the 2008 failure of private financial markets to responsibly price certain financial contracts) once observed to me that in modern times, much of the law is a response to new technologies brought to scale by private entrepreneurs.

The new technologies – steam engines, electricity, telephones, airplanes, the internet – change lives and provoke new behaviors and new ways of looking at the world.

The technology of the internet and the invention of the smartphone are new technologies which have changed our politics and our journalism. Politics has become more personal, more emotional and more tribal. Journalism is no longer a profession, but entertainment. Journalists have become narrators of stories designed to grab our attention so that we will tolerate viewing advertisements.

This not-so-brave new world has changed the business model for print media. Traditional newspapers and magazines have lost advertising revenue and subscribers. Since 2004, some 2,000 newspapers have gone out of business in the U.S. The new model for journalism is less a public service and more a hard-hearted commercial scramble for profit and the way to profit is to attract consumers. What consumers of media want now is a simple storyline, a quick, gossipy take on life; emotions, not facts, nuance or the complications which often accompany the truth.

In 1964, the U.S. Supreme Court provided traditional media with a high level of protection from libel litigation. The court did not want media to be intimidated and fearful of publishing the truth about government and those who were public figures. The court concluded that disclosure was such an important deterrent to abuses of power that it needed to be encouraged. Thus, the court provided free speech protections to speech that was untrue, but not knowingly or maliciously published by a media enterprise. That ruling came in the case of New York Times v. Sullivan.

But times do change. In the drive to secure reliable income, contemporary major media firms have, more and more, identified with one cultural mindset over others to gain a loyal consumer following. A number of major media firms – the New York Times, Washington Post, CNN – have closely aligned their narration of events with storylines most closely aligned with the Democratic Party’s policies, priorities and perspectives.

Under these circumstances, the high level of protection given the media by New York Times v. Sullivan has come into question. Does storytelling need the same degree of protection as truth telling?

Recently, Judge Lawrence Silberman of a lower federal court wrote a dissenting opinion in a case of libel which laid out reasons why the rule in New York Times v. Sullivan should not be overruled and replaced.

I have excerpted the relevant parts of Judge Silberman’s opinion here.

Can Wokeness Ever Be Harmonized with the Ethics of Moral Capitalism?

The rise of racialized wokeness as a major cultural and political challenge to free speech, human dignity, constitutional checks and balances and personal integrity is principally an American crisis of values conflict. But, you may have noted opposition to the importation of such post-modernist wokeness into France on the part of French President Emmanuel Macron and many French intellectuals. Wokeness, as a cultural movement in the U.S., has some similarity to the insistence of the Chinese Communist Party for the acquiescence by all to a cultural trope, proclaiming the superiority of “Chineseness” in a global context.

The case for wokeness has been made on moral grounds. Its proponents assert they are seeking social justice and remediation for past wrongs, for self-abnegation by some and assertion of priority and privilege by others. The Caux Round Table proposed ethical principles for business, a “moral capitalism,” in 1994, long before the first stirrings of wokeness and its application to all sectors of American society.

Thus, the relationship between wokeness and moral capitalism now comes to the fore. Are these two moral visions compatible with one another? Can they be harmonized? Or, as I believe, is wokeness seriously deficient as an ethic and so has no claim to moral authority in business enterprise, commerce and finance?

I put before you my reasoning in “Wokeness and Moral Capitalism” on the congenital infirmities of wokeness by placing it in the historical context of Rousseauist narrative.

Please do let me know your thoughts and concerns on this challenge to all of us in defining just what is social justice and just what each of us should expect from others in their acknowledgment of our human dignities.

Has the U.S. Become a Circular Firing Squad?

Our Fellow, Michael Hartoonian, in his article “Our Circular Firing Squad” raises a very pertinent question: can cultures commit suicide?

I can think of many cultures being conquered and then having their culture suppressed. The Hittites, Trojans and Etruscans are no longer with us. The Chinese sinicized the ancient Yueh tribes living south of the Yangtze River and are at it again with Buddhist Tibetans and Muslim Uighurs.

Then, there are cases of assimilation. Did not the small Latin states become Roman and, later, Gauls and Goths Romanize themselves? Christianity pushed aside the pagan cults of the Celts and Germanic peoples. The Yueh peoples, except those we now know as the Vietnamese, accepted sinicization. The process of modernization (Westernization?) since World War II has brought many modifications to cultures and societies around the world.

But how many cultures have evolved their values in a way that lead to their collapse from internal discord or self-sabotage?

Gibbon’s explanations for the decline and fall of the Roman Empire pointed to an internal devolution of key value variables – trust, self-confidence, willingness to fight wars, personal assumption of responsibility and the rise of a rentier elite.

One might say that one of the most important existential functions of ethics is to forestall cultural, social and political collapse.

Michael brought these thoughts to my mind. His description of how a circular firing squad mentality takes over a culture exposes the consequences of turning against virtue ethics – in both ideals and practices.

In 59 BC, Cicero similarly exposed what was driving the Roman Republic to suicide: nos virtutem adligatam est – “our virtue is in chains.”

Thus, put on notice by Cicero, the Caux Round Table has chosen for its motto Virtus Non Adligata or “Virtue is not chained.”

As Santayana said, “Those who cannot remember the past are condemned to repeat it.”

I would appreciate your thoughts on the trends which are becoming more and more dire for my country.

A Science of Ethics? Entropy, Perhaps?

The rise of narrative as an alternative to truth among the well-educated American elite is inconsistent with moral capitalism. Narratives belong to the genre of story, myth, fairy tales, horror and romantic fictions. Narratives must design characters to carry their story line.

Narratives, many times, are morality tales used to teach principles or warn of consequences and to present characters as role models for emulation or rejection.

Moral capitalism has a core set of understandings which seek to be grounded in reality and not just socially constructed. The Caux Round Table (CRT) Principles for Business do not embrace an “anything goes” mentality of entitlement.

Companies are bound to their stakeholders by interest and moral responsibility. Companies are now to have “purpose,” more meaningful than the making of profits.

But in this era of all ideas and ideals only being self-serving narratives, on what can the CRT principles be grounded?

I attach here a long essay proposing use of the Second Law of Thermodynamics as a basis for reasoning about good ethics. The Second Law is not a narrative; it is said to be a law of nature, beyond any social convention. If we want to deny it, we may, but that will not make it disappear.

I ask your indulgence in taking a look at the credibility of my argument for this fruitful intersection of science and ethics around the dynamic of entropy.

I would be very interested in your thoughts and feedback.

March Pegasus Now Available!

Here is the March edition of Pegasus.

In this issue, we revisit the Universal Declaration of Human Responsibilities of 1997 and how it relates to our principles.

We also include excerpts from a recent report of the Coalition for Inclusive Capitalism, background on our new initiative to recognize distinguished business leadership in social responsibility and a comment about our rather special practice of “round tables.”

I would be most interested in your thoughts and feedback.