Three decades ago, I left my university campus with a degree in Business and a certainty the profession had a major flaw: The scorekeeping system does not work.
I had learned well the taskmasters of business, the balance sheets and profit and loss statements. Yet, astoundingly, there is no place on those documents to reward a company for doing "good," and no place to penalize it for doing "bad."
I don't mean how much money the enterprise rakes in; the system oversees that with zeal. But there is no accounting for how a company contributes to the overall health of the community in which it operates. There are no ledger credits for decisions that benefit the society, or debits for actions that harm the environment, for example; no way to record the jobs and stability a company provides to the community as an asset.
In the books, those things do not count.
This silence of accounting was a big reason I became a newspaperman, instead. I traveled the globe, and I think what I did was of value to society. Now I sit, well-salted with experience, but left without a job -- a casualty of the very flaws of the system I had seen as a college kid. I watch with chagrin as the economy collapses because the accounting system rewards individual profiteering and ignores a greater responsibility.
Of course Wall Street was consumed by greed; greed is the very basis of the system. And of course big corporations, including the newspapers in which I labored, are falling; they were hoisted atop an accounting pyramid scheme. And of course workers are being laid off in droves; they have no more weight on a financial sheet than widgets or ballbearings. Economists use the term "human capital," but nowhere in accounting principles are people counted as an asset -- only as an expense.
We berate our politicians for not preventing the catastrophe (for that is what it looks like from this side of the unemployment line) and demand fake contrition from a few big CEOs. But there is a strange absence of questions about the whether the basics of our system need to change.
Americans still seem to accept without question that workers should be booted out the door before profits are allowed to dip too low. I was posted in Japan for The Washington Post from 1999 to 2003, when that country still was dragging itself up from an economic slump. American businessmen would smugly lecture the Japanese for a failure to operate efficiently. They would say big Japanese corporations were unwilling to make the "tough" decisions to cut costs in order to boost lackluster profits. The Japanese executives would nod politely, and do nothing.
I admired their response. They were operating by an unwritten set of books, different than Western accounting principles. Their decisions put a value on keeping people employed. For the good of the society, they knew that keeping a company man in the company, letting him provide for his family and pay his rent, letting him maintain his pride, keeping the community structure intact, was worth a lot in the long run.
We demand of our government social accountability, but give a free pass to our businesses and institutions. What sense does it make that our federal government is desperately trying to put people to work, while institutions and corporations -- acting in loyalty to their ledgers -- are busy laying them off? Even local governments and educational institutions announce job cuts in the name of budget constraints with no sense of betrayal to the greater social goal.
We need an accounting system that puts a value on society's needs. We should value businesses in a different way, not just by the speculation of the stock market. There is puzzling little outrage at the chief instrument of our economic mugging: the takeover. Somehow, our nation's business has lost the goal of creating companies that simply make an honest profit, provide jobs and help create stable towns and cities.
Instead, companies are supposed to always and forever grow. They are supposed to gobble up other companies, or be gobbled themselves. In these takeovers, falsely advertised as creating more efficient economic entities, more employees are thrown out of work to try to offset the huge debts created by the purchases. Somehow this has become a glamorous term: leveraging. A more fitting term is immoral.
I am sure free marketers will cry that our system finds the most efficient use of capital, and to weigh it down with social considerations would foul up the works. I doubt many of those critics are unemployed. Others will say taxes paid by businesses reflect social goals. Yet that is just a tinkering of the system; CEOs are applauded for avoiding taxes, which on the whole, they have done very well.
We need a more thorough overhaul, with an accounting system that has a column for debits and credits for social responsibility, and which calculates a job at what it is really worth to us all.
Doug Struck worked for the Baltimore Sun and The Washington Post, both of which are shedding jobs. He has recently been laid off from Harvard University because of budget cuts.
I have read other places that the MBA generation made a conscious decision that the only stakeholder that counted was the shareholder (usually other large corporate entities), not the employees and not even the customer. All of the sins discussed above derived from that, including the shift from a manufacturing economy to a service economy (even IBM is now dominantly a service company) and the share price as the sole measure of a companies status and success.
What was once a balance between management, labor, and government regulation has been destroyed as the corporate elite waged and won a culture war. It may be that the accounting sheets don't need to change so much as they should return to being only one measure of the value of a company.
CAPITAL in accounting terms means
Debt + Equity
when you are asked to calculate say Debt/Capital
what you are calculating is Debt/ (Debt + Equity).
Case closed !!
Human capital is an economic term-not an accounting term. If you bothered to cross train you would know that.
Regurgitating what you learned in your community college class accounting class is also not an argument-it's parroting. If you can't follow the reasoning ask someone, don't assume that you are correct.
http://www.investopedia.com/terms/h/humancapital.asp
"What Does Human Capital Mean?
A measure of the economic value of an employee's skill set. This measure builds on the basic production input of labor measure where all labor is thought to be equal. The concept of human capital recognizes that not all labor is equal and that the quality of employees can be improved by investing in them. The education, experience and abilities of an employee have an economic value for employers and for the economy as a whole.
Investopedia explains Human Capital
Economist Theodore Schultz invented the term in the 1960s to reflect the value of our human capacities. He believed human capital was like any other type of capital; it could be invested in through education, training and enhanced benefits that will lead to an improvement in the quality and level of production. "
I worked for a company that believed that if you eliminated all labor costs they would make a huge amount of money (profit). After a month they had no product to ship, but it worked on paper at least.
I believe that if an inverted org chart was used and followed a more realistic business plan could be accomplished.
I think you have mixed up your accounting terminology here. Capital is not an asset, it is roughly construed as net worth, the difference between assets and liabilities. The economist uses human capital to accentuate the factors of production (land labor and capital) meaning that an experienced farmer is something like human capital in that he adds more than an equivalent unit of labor. Take Zimbabwe, people are starving in what is a wonderful land for production. Ask yourself why? Human capital, it was driven off the land. The country is full of people but who is an experienced farmer? Human capital is essentially experience and know-how. Now think of traditional community banking being replaced by GMAC (for zero rate car loans that seduce customers into high price tradeoffs) and subprime mortgage brokers(kids) in strip malls who make money, not from traditional banking, but from volume without regard to risk (they make their money up front) and you see the sleek Zimbabwization of America. And then you ponder human capital. You do know that slaves were chattle?
Human capital: there is some debate as to whether it actually exists in economic theory. In my view the concept, if it is indulged, subordinates humans to a balance sheet. Once you do that you can start doing pretty much anything with a human that you can do with any other asset -- especially if you can turn it into a liability simply by thinking it such. I think that was the theme of the post really.
Hopefully we will one day start using the balance sheets to work out whether what we are doing is worth all the effort or whether we are just working to make some people obscenely rich.
Capital goods may be assets, but then the use of the word capital is an adjective. Where the equity reference is a noun. Karl Marx in his Das Kapital was not referreing to tractors or computers or people. In the labor theory of value all excess of the workers flowed to the capital, the net worth of the capitalist. His objection.
I lstened, just yesterday, to Bernanke refer to capital flows. Only capital does not flow. If you listen closely we are a people who misuses the word capital. (I know capital markets where common shares are traded in the denomination of money.... i.e. the flow of capital, but!!)
It is rather like a religion: you don't indulge thoughts that challenge the faith: money is the most fungible and therefore the most unbiased and responsive measure of value. Mess with the market and you pervert the true value of things.
How do you make any headway with someone who thinks money and value are essentially the same thing?
And so it goes. Accounting DOES rule our lives in small and large ways. Crooks are good at accounting, so good that they keep several sets of books, one for each potential audience. One for the IRS, One for their shareholders/investors, One for themselves... at least these three.
You pointed out that they don't account for the value of employed persons to society, but you also seemed to note that they don't account for the value of employed persons to the company. How much would these companies be worth if none of the employees showed up the next day?
These are flaws which need to be addressed and understood in context. Thank you for pointing them out so well. As we are invited by economic collapse and calamity to re-invent ourselves, perhaps this laudable goal, of fairly accounting for the value of human beings to the company and to society (and the company's value to society and the planet as well) should be one of the primary goals for the business community to work towards. Let's call it simply, ACCOUNTABILITY.
If only.
The idea that social responsibility can be measured in an excel file is ridiculous.
I don't want to be labeled a "free marketer", but I think employees and employers should be free to make their own decisions.