Intellectual capital: in sickness and in health

The mantra “our employees are our greatest asset” comes to the fore in the
90s with the emergence of intellectual capital theory – which said success in
the knowledge economy was reliant on organisations leveraging their intellectual
rather than physical or financial capital.

Human capital was identified as a key component of intellectual capital,
along with customer and structural capital. It encompasses the attributes
employees bring, which they exchange for wages and thereby contribute to the
value creation process.

Most people can recognise the attributes that make human capital such an
important asset – qualifications, skills, experience, expertise, team working,
innovation, leadership, etc. For the most part, however, employee health and
wellbeing is absent from such lists. A moment’s reflection should indicate that
this is a serious oversight.

Just as the absence of an expensive player from a football team is a major
constraint on its success, the absence of valuable employees from the workplace
poses similar problems.

Currently, sickness absence in the UK is estimated to cost £14bn per year.
This figure covers only the cost to employers. It is likely the full cost,
including to employees and broader society, is several times higher. The average
cost stands at £692 per year, per employee, and continues to rise even though
the actual number of days lost has been falling. Public sector employees are
most prone to sickness absence, with those in the health sector seemingly the
most susceptible – averaging 11 days per year. Large organisations generally
fare worse than small and medium-sized ones.

Overall, two thirds of absence is short term, although a rising proportion is
now for over four weeks, particularly in the public sector. There is a worrying
growth in stress-related, longer term absence among non-manual workers, the
archetypal knowledge economy employee.

The ICAS study

FDs place much less importance on the physical and mental health of employees
than human resources directors, according to research I carried out, along with
Howard Kahn and Joanna Stevenson – for the Scottish Accountancy Trust for
Education and Research. We questioned 1,000 finance and human resource directors
in both public and private sectors about their approaches to promoting high
levels of employee health and wellbeing.

The same position was evident when we asked about how they were trying to
improve employee wellbeing. Approximately half of FDs said some steps had been
taken compared with three quarters of HR directors. Less than a quarter of FDs
said their organisations intended to place greater importance on such issues in
the future, compared to more than half of the HR directors.

This difference does not simply boil down to the fact that HR professionals
will necessarily be more enthusiastic about such matters. Both groups contained
senior managers who are expected to take a corporate view. Our questions
explicitly avoided asking for respondents’ own views on these issues. There is
an important division of views.

Indeed, 29% of FDs viewed accounting for intellectual capital as a
distraction, compared to just 3% of HR directors. However, FDs were more open to
viewing workforce health as an organisational asset, as they were to placing a
financial value on it. Despite the usual litany of objections to any proposed
departure from the historical cost convention, the FDs, when pressed further,
offered substantial support for using some combination of narrative and numbers,
including non-financial numbers, in a supplementary report of some description.
Only a tiny minority seemed unshakably wedded to employing only hard number
valuations for any such excursions.

The way forward?

Employee health and wellbeing is a remote concept to many FDs. This may be
due in large part to the failure of intellectual capital theory to impact the UK
accountancy profession. Although studies exist demonstrating that UK companies
are increasingly reporting on their stocks of intellectual capital (or
intangibles) in financial statements, they continue to lag behind their European
counterparts, not to mention those in Australia and the Asia-Pacific region,
where many governments have actively encouraged intellectual capital accounting.
As a first step, it would be desirable to see something similar pursued in the
UK.

At the same time, it is necessary that the UK accountancy profession resists
going overboard on the issue. Such cost increases are the symptoms of the
underlying problem. Seeking to reduce such costs, say by introducing incentives
to entice someone with a hangover to come to work on a Monday, can only have a
limited impact. Such incentives cannot be in the best interests of an
overstretched systems analyst on the edge of clinical depression nor their
employer. Increased ‘presenteeism’ will worsen the problem, result in longer
absences and increased costs.
A more constructive approach borrows from the broader intellectual capital
accounting field. It seems desirable to explore ways of measuring and reporting
growth in employee health and wellbeing as an additional element of an
intellectual capital report. This might be incorporated into some form of
scoreboard, such as the balanced scorecard, intangible assets monitor or as a
contribution to a more narrative-based statement, such as that developed in the
Nordic countries at the beginning of the decade. Either option keeps health and
wellbeing well away from the balance sheet or profit and loss account, thereby
challenging the profession to operate in concert with HR and occupational
medicine functions.

A more radical solution exists in the guise of promoting self accounts, in
which employees themselves use modern communication and information technology
to share their experiences of improving their wellbeing within the workplace and
the beneficial consequences this has for their value creation activities.

Professor Robin Roslender is Professor of Accountancy at Heriot-Watt
University

Further reading:

Read the full ICAS report