The Highest Value Capital in Any Business – Human Capital – Financial People Just Seem to Miss It

Peter Drucker comments about business structure and management emphases tickle me. They tickle me because the very statements he makes run absolutely counter to the widely held beliefs of today’s “experts.” The difference is staggering. In Managing in the Next Society, Drucker makes comment about the problem “financial people” have managing business. “There’s an enormous challenge ahead to educate the owners of business, many of whom, as I’ve noted, are financial people. I once was a securities analyst, so that gives me license to say that it is virtually impossible to make a financial person understand business. I am not being facetious. Financial people don’t deal with the issue of balance between often conflicting elements – short versus long term, continuity versus change, improving today versus creating tomorrow. Corporate leaders who wrestle with these issues every day know the amount of struggle involved, but it’s difficult for financial people to understand this.” This ought to shake you to your core.

Why all the emphasis on managing by financials? It happened simply and innocently enough. We began to confuse the financial statements with the business, itself. Human capital is thought to be either non-existent, or of little real value. For more than 50 years the relative stability of technology and demographics paved the way for repetitive, mechanical hierarchical business models to succeed. They had predictable structure, and outcome based on repetition of mechanical practices, which then yielded predictability in financial results, creating the false association. Good financials were erroneously equated with good business. The two patterned so closely that the difference would be difficult to discern. Market Hyper-Dynamics Defies Management by Financials

Today’s technological landscape is no longer as stable and predictable. The demographics are also nothing like those characteristic of the last 50 years. The entire landscape is in constant and accelerating change. In this new world, it is now necessary to see a business for what it really is, and to recognize that financial statements are merely the report card for how the business is working. That is their only relationship. A Business is not a Machine, it is more like a life. A business is a complex web of conversations and social relationships. Out of these comes the continuous ebb and flow of the menagerie of products and services, which are developed, created, communicated, delivered, and serviced by provider companies to their customers.

In this hyper-dynamic marketplace, it is far less important what a company thinks they do as much as why, for whom, and for what betterment of the customer and the world itself. Conversations and relationships are characteristics of a different dynamic than a machine. They are characteristic of people, humans, living things. They are organic in their very nature, and require organic processes and organizations to endure. People are the very soul of business. Human Capital produces the value of all other capital. I heard the CEO of an energy related firm make this very interesting statement. “When we consider the human relationships as critical in my enterprise, we have a struggle as our material “assets” as shown on our financials represent $BB, while our people “assets.” even as costs represent only $MM. It seems that the larger assets are the most important.

We are coming to recognize that the real value of the material “asset” is totally dependent on the performance of the people, and this is leading us to realize that the people “asset” is of greater significance to the company performance, rendering the material asset as valuable, or potentially, value-less.” Which “assets”, which “capital,” do you value most? I guarantee, if you think like a financial person, you’ll answer incorrectly. If you think like a traditional business person, you’ll risk the same error. Consider thinking more like Peter Drucker. Then you can begin to place more of your energy and investment into the things that produce your greatest ROI. These, of course, are your people, your Human Capital, and if you’re like most of today’s managers, you are well under equipped to do much to make improvements. It is time to get some help for your organization. I wouldn’t wait. I might even call a PEO.