IMPORTANCE OF HR AS AN INTANGIBLE ASSET IN ORGANIZATIONS: DEVELOPMENT OF THE CONCEPT(3)

Acts as key drivers

Intangible assets have become the key drivers in the new economy, according to American accounting and finance professor Baruch Lev, author of Intangibles: Management, Measurement and Reporting (2001). He defines intangibles as “the claim to future benefits that do not have a physical or financial (a stock or bond) embodiment”. Such things as leadership and governance, know-how, tacit knowledge, credit ratings, plant flexibility, customer and employee loyalty, informal processes and networks, and brand strength are much more important factors when it comes to the future growth expectations of investors. The market values of new economy companies like eBay, Intel, Nokia and Skandia are largely determined by intangibles, and managing them is critical because of their impact on shareholder value. The companies treat intangibles as wealth-creating assets that, if managed effectively, produce increasing returns. For example, effectively managing stakeholder relationships produces a relationship capital base from which returns can be generated

Importance of HR as Intangible Asset

Intangible assets are frequently overlooked by management and its shareholders. According to Baruch Lev (2004), author of Intangibles: Management, Measurement, and Reporting, over half the market capitalization of public companies are attributable to these intangible assets. In his research Lev points out “investors systematically misprice the shares of intangible-intensive companies.”

Besides infrastructure, communications, patents, brands, and other intellectual property, human resources, is in fact, the core component of the intangible asset equation. Human resources encompass customer relations, the working environment, turnover rates, training and development of staff, etc. In a study of over 750 publicly traded companies, Drs. Bruce Pfau and Ira Kay, were able to quantify the impact that poor human resources policies and procedures have on the intangible assets, which in turn directly affects shareholder wealth and the return on their investment (2002). Furthermore, they were able to determine a “clear relationship between the effectiveness of a company’s human capital management and shareholder value creation.” In companies that managed their human resources very well, there was a 64% total return to shareholders over a 5-year period. In contrast, for companies not managing their human resources well, they experienced only a 21% return during the same time frame (Pfau 2002).

Human resources factors affecting the shareholder return are numerous. A few factors affecting overall market value are having a low voluntary turnover of managers/professionals, systematic new-hire orientation programs, a high percentage of company stock is owned by employees, the company helps poor performers improve, avoiding varying the office space based on position, and high percentage of workforce participates in opinion surveys.