Google and the US can teach hard-nosed business and finance chiefs in the UK a thing or two about enhancing their company’s valuation on the back of their expertise in ‘human capital’. Duncan Brown reports

Numbers speak louder than words, according to an accountant friend of mine. Yet something strange is happening in the world of corporate financial reporting. A phenomenon is emerging, which my friend calls ‘human capital’, or to you and me, people.
On the dry, detailed pages of the US Securities and Exchange Commission website you can read the well-publicised application in early May of internet search company Google for the initial public offering of its shares. In their introductory note, do founders Larry Page and Sergey Brin concentrate on telling us about their stellar turnover growth, rigorous cost efficiency and excellent financial prospects?
No, we learn instead that “Our employees, Googlers, are everything to us… we will reward and treat them well. Google is organised around the ability to attract and leverage the talent of exceptional people…we empower them to change the world”.
How do you feed that into a financial valuation model?
“Pah” you say, that’s just these wacky West Coast geeks, destined to go the same way as most of their dotcom-crashing forbears. But no, look also in the corridors of the federal government in Washington. The Office of Management and Budget now requires all agencies to include ‘human capital management’ information in their annual plans and reports.
The phenomenon is evident on this side of the Atlantic too. Tesco’s 2003 financial report and accounts has a dozen smiling employees, not one a board member, adorning its cover. Inside, chairman John Gardiner writes: “Our programme for long-term growth has been delivered through the effort and dedication of our people.”
In similar vein, Mervyn Davies, group chief executive at Standard Chartered Bank, writes: “We develop a competitive edge through our people… our ability to attract and engage people to give their best drives shareholder value.”
So what’s going on? Have these hard-nosed business and finance chiefs suddenly gone all soft and gooey, started kissing employees and their babies? Hardly. Two main factors are at work, the proverbial carrot and stick.
The ‘carrot’ comes from the nature of growth in our knowledge and service-driven economy. Strategy expert Jim Collins explains: “The sources of competitive advantage have shifted from finance to technology then to human capital.”
Around 75% of the market value of FTSE 350 companies now comprises so-called ‘intangible’ assets. These include brand value, research and development, customer service and reputation - factors that are totally dependent on staff performance and not just a few key ‘stars’.
How must the publishing house in which a lowly paid assistant turned down a script from an unemployed Scottish schoolteacher feel now? Another assistant at Bloomsbury accepted JK Rowling’s tome and its profits have mushroomed on the back of Harry Potter.
The ‘stick’ comes in the form of regulations from the Department of Trade and Industry and a report from the DTI’s Accounting for People Taskforce, on which the Chartered Institute of Personnel and Development advised. From 2005, all quoted UK companies and government departments will have
to produce an operating and financial review, setting out strategy and factors material to its achievement. As the Taskforce says, it would be an unusual company that did not regard its employees as critical to its success and “include information on human capital management” in its OFR. As a joint meeting of senior CIPD and Institute of Chartered Accountants members concluded: “Organisations need to stop being shy about human capital if they are to give a full view of their performance.”
Tesco will be able to point to its comparatively low employee attrition rate, extensive employee benefits and employee share schemes as evidence of its commitment to its most important asset.
Googlers look set to receive shares worth $1 million each, and already benefit from free meals and washing machines.
But what is your company saying and demonstrating in its annual report and accounts about adding value through its people? I certainly won’t be investing my own, admittedly limited, financial savings, or even my more extensive personal ‘human capital’, in any company that can’t provide me with a decent answer. Will you?
n Duncan Brown is assistant director general, Chartered Institute of Personnel and Development