New guidelines ignore human capital

Mar 01 2005 by Brian Amble Print This Article

Britain is missing an opportunity to improve productivity and competitiveness and to enhance the quality of information available to investors because of fundamental flaws in the draft Reporting Standard for operating and financial reviews (OFRs) currently being consulted upon by the Accounting Standards Board (ASB)

Responding to the consultation, the Chartered Institute of Personnel and Development (CIPD) has expressed alarm and disappointment at the failure of the ASB to give sufficient weight to the key role of human capital in determining organisational performance.

Under the new rules, UK companies will have to provide separate operating and financial reviews alongside their annual reports that lay out the factors affecting their performance.

But Angela Baron, CIPD Organisation and Resourcing Adviser, said that she is horrified at the failure of the Accounting Standards Board to give proper weight to human capital in its draft reporting standards.

If organisations are to act on all information available and relevant to their long term performance, it is essential that they consider the contribution and value of human capital in equal measure with other forms of capital, she insisted.

"In a modern, knowledge based economy, people are frequently the most valuable and important form of capital that an organisation needs if improved long-term organisational performance is to be delivered.

"The ASB have failed to reflect the Secretary of Stateís intention to embed in law the concept of Enlightened Shareholder Value," she said

"We are disappointed that the issue of employees and their relevance to long-term performance has been allowed to slip so far down the list of factors that are deemed relevant to operational and financial reporting."

And she added that if companies are not required to report on human capital, investors will lack one of the most important sources of information to guide their investment decisions.

"In our view, these standards will do little to encourage businesses to develop their understanding of the most valuable, flexible, and in many cases largest pool of capital available to them.

"The result will be a country where we continue to place more value on tangible resources such as property or technology, which decreasingly provide any form of differential competitive advantage, than on human capital, which has been shown to be one of the single most important determinators of productivity and profitability."