The Value of Intellectual Capital

In this post, I am going to challenge our current understanding of the value of Intellectual Capital.

The concept has been widely treated and researched over the last several decades and a simple scan of the corresponding page on Wikipedia - https://en.wikipedia.org/wiki/Intellectual_capital -, simply defines it as:

"...the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relating to its relationships (relational capital), and everything that is left when the employees go home (structural capital)...".

So far, I'm guessing there will be significant agreement on this context.

My challenge starts when I look at the balance sheet of a regular company - e.g. a public company that shares their balance sheet details for disclosure purposes.

I've reviewed a handful - I have to admit my skills, knowledge and experience in finances, accounting and such are minimalistic -, and I've noticed a discrepancy.

The assets section/column of the balance sheet contains physical assets, financial assets and occasionally some items of intangible assets. These latter ones, seem to be supported by a specific IFRS standard - IAS 38 (https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/ias-38-intangible-assets.pdf).

Unfortunately, the level of detail and hence the amount tracked in these items in the asset section seems really unsatisfactory.

By comparison, in the liabilities section of the same balance sheet, the "cost" item of salaries, is tracked with high accuracy and typical accounting discipline. Since it is easily trackable through the existing accounting practices.

In my opinion, this creates a dramatic imbalance on the balance sheet - pun intended!

Pivoting to the concept of fungibility - maybe one of the underlying assumptions for the above perspective is that any employee of a large organization is fungible. And there is a certain amount of truth, since most of us professionals have skills that are more or less common on the labor markets. Scaling that to large organizations with thousands or tens of thousands of employees, is a very different concept.

This is a great point to walk through a mental experiment of sorts, to illustrate my point here above.

Let's assume a large corporation with, say, 25,000 employees. Let's imagine that the CEO, while striving to understand Intellectual Capital, decides to take all 25,000 employees - all fungible, right? - and lock them out of the "virtual building" for 3 months. And replace every one of them, with a brand new person. And then proceed to focus on even the "trivial" BAU - business as usual!

What's the image that comes to your mind just about now? Because to me, it is between laughable and scary. Not to try to come up with other adjectives.

At this point, I would propose that corporations that value their employees, add a more detailed and potentially accurate dimension of Intellectual Capital on their balance sheet, side by side with physical assets and financial assets.

This will allow the corporation - from the C-suite throughout the whole organization -, to dedicate significant efforts, budgets and focus to the build-up and management of Intellectual Capital. The same as for the other types - after all the same corporation is quite well versed at managing and building up their physical and financial assets.

And by the way - there's a good chance their stock price will go up, since the assets column in the balance sheet should increase by a significant amount - the accurate representation of how much is the whole of the organization, in human resources terms, worth it to the corporation.

Over to you, my friends that managed to read all the way down here to the end!