Who Owns Employee Knowledge?
OK, call me eccentric, but I've been thinking lately about balance sheets. About how they hide as much as they disclose. It's one those curiosities we rarely discuss, that public companies trade at a market value far above asset value. We depend upon this fact to make investments pay off, hoping to see our stocks trade far above book value. But it's startling, really, how large that discrepancy is. At year-end 1995, according to CFO magazine, the 500 companies in the Standard & Poor's index had fixed assets worth $1.2 trillion, but a market value of $4.6 trillion. Let this sink in. These companies had intangible assets of $3.4 trillion or THREE TIMES the value of fixed assets. Since the S&P 500 accounts for 70 percent of the value of all publicly traded U.S. companies, something remarkable is going on here.What are these intangibles? What makes a company so valuable, but is missed by all those meticulous accountants? It's primarily two things:1) Discounted future value (the market's guess what the company will be worth over time), plus airy other things like reputation.2) Knowledge base. Since knowledge is lodged in particular brains, we might call the "knowledge base" by its real name: employees. Unlike true intangibles such as future value floating somewhere in mental space employees are in fact tangible. They exist in three-dimensional space. They show up for work every day (by and large). CEOs say "Employees are our greatest assets." Still, they're invisible on the balance sheet, though quite visible to the stock market which manages to capture for itself the dollar value of the knowledge in employee heads. Why is a machine recognized as valuable, while a person with 20 years experience running that machine is not? It's an anomaly increasingly out of step with the knowledge economy. And some folks are thinking about what to do about it.At the global level, interesting conceptual work is being done by the World Bank, which in September 1995 unveiled its "Wealth Index," focusing on the missing asset accounts in measures of national wealth. As Hazel Henderson has described it, the index identifies four categories of assets: 1) Natural resources, representing 20 percent of a nation's wealth. 2) Built capital, representing another 20 percent.3) Human capital. 4) Social capital, such as organizations and families. Human and social capital together represent 60 percent of national wealth.It's intriguing to think what different consequences we might see, if this picture became common. Educating children would be a gain to national wealth, instead of simply an expense in the budget. Ancient forests cut for timber would be a loss to assets, instead of only a gain to GDP. "This is a major conceptual revolution," Henderson said, in a speech to the Social Venture Network. "It's apparently still causing a civil war among economists, since virtually all economic textbooks have been focusing on only 20 percent of the action: the built capital category." Taking this concept inside the corporation, imagine how different a layoff would seem, if viewed as a wholesale destruction of assets, instead of an elimination of pesky expenses. But few firms acknowledge employees truly as assets. One of those few is the Skandia Insurance Co., a Swedish firm with $7 billion in revenue, which includes employee knowledge in measures of "hidden assets" it's been publishing in supplemental annual reports since 1994. Its reports hint of how it can be done: with measures such as an employee "empowerment index," the average age of employees, and training expenses per employee.We might give a small cheer at this -- but then ask, isn't it odd that even a progressive company views employees as "hidden" assets? In what sense are they hidden? Call up the company, they answer the phone. Buy from the company, you buy from them. They made what you're buying. Employees are indeed important assets -- with a value the market finds entirely tangible. To the tune of billions or trillions of dollars. There's a strong case here, that employees have a property right in the company. The market is happy to pocket the value of employee knowledge. But why do we imagine stockholders rightfully "own" it?