The value of human capital

Updated: Jan 21 2002, 05:30am hrs
While economists considered issues such as how trends in school attendance impacted the stock of human capital of a country, returns to education across countries, inter-generational mobility and transfers of wealth across generations, trade offs in the quality and quantity of children and economic development; practitioners and researchers of management focused on the basic concept that people working in an organisation should be treated neither as factors of production nor as costs or assets but they are, and should be, treated as investors in a business, paying in human capital (instead of financial capital) and expecting a return on their investment. It is somewhat like sweat equity.

Employees own their human capital and firms seek to protect themselves from the transfer of their human capital investment to other firms. Human capital is embodied in the individuals who are employed in firms or own and run business firms. Unlike a mutual fund or index fund where one invests in a large assortment of companies thereby limiting the investment in any one entity and distributing the risk, when we work for a company, we are investing all of ourselves in that one organisation to the exclusion of others and concentrating all of the risk. It is therefore necessary to treat the owners of human capital appropriately. Workers will produce the greatest value for those companies who will generate the maximum value for them.

Human capital can be thought of as being of two types: generic and specific. The generic human capital consists of all the qualities and capacity required for being a good citizen. Specific human capital consists of the qualities, capacity and skills required to function effectively in and contribute to a given organisation or industry. The responsibility of developing human capital is shared by the individual, the organisation or industry, the family and society. Generic human capital can be developed through the educational system, societal values and norms, and is influenced by the basic upbringing in the family while specific human capital has to be developed by organisations and industries.

From another perspective, generic human capital is developed through the primary, secondary, and general higher education system, whereas specific human capital for business and industry is developed through the specialised education system including professional and vocational education. Experience in a given industry or activity is a major source for developing specific human capital. What can and should companies do Instead of worrying about calculating the worth of human assets, companies should concern themselves with defining what human capital owners get out of their association with the business. They should focus not only on the value of the individual to the organisation, but equally on the value of the organisation to the individual. This is the true value that deserves attention from managers who hope to create a lasting human capital.

In assessing value, the intangible assets of an organisation are likely to be worth considerably more than the measured and measurable tangible assets. It can be logically argued that human capital is the ultimate driver of the value growth. The key conditions for such growth are likely to be:individual capability, motivation, leadership, organisational climate and workgroup effectiveness. A combination of these five goes beyond economic value added.

As in everything else, it is the implementation of concepts arising out of human capital that will distinguish excellent organisations from average organisations. One of the key factors in developing human capital is organisational climate, which is the way an organisation works internally. Merely calling the people working in an organisation human capital is not likely to change things. What will have a practical effect on the ground is how we really think about people who work for us and what we actually do about them. In this context we have to look at what roles do we play in organisations.

Each of us is part of all the human capital of the organisation we work for or we own and run. The question we need to ask ourselves is, Am I functioning as an investor of human capital in the organisation that I work for or am I functioning as a speculator If I am ready to quit and take up a more challenging or better paying assignment or if I am willing to sell my company to anyone who offers me an attractive price, then obviously I am not an investor but a speculator. In this case, for me to expect people working in my department or organisation to function as investors of human capital is unrealistic.

The role that I play as individual also carries into the roles that we play as captains of industry. The question here is Do we encourage investor-like behaviour or do we encourage speculator-like behaviour Here again, our actions will speak louder than our words.

(Jagdeep S. Chhokar is professor and dean, Indian Institute of Management, Ahmedabad)