How to Maximize Intellectual Capital Investments

The thrust to maximize returns on intellectual capital investments has been a mainstay of business and performance management consultants since the early 80’s. Every corporation in America, was inundated with promises of benefits by an increased investment into understanding and creating value using the intellectual capital route. The 1990’s, or the rise of the dotcom generation largely benefited from this fad. Unfortunately, when the bubble burst, and investors were wanting to understand what had happened to their investments, no one was able to provide an answer good enough to assuage investor loss.

What was largely discovered is that the valuation method used to increase intellectual capital worth employed a huge amount of creative accounting tricks. Valuation was as varied as the number of ice cream flavors available. You all know what happened next.

Intellectual capital investment and human capital investments are considered to be distinct in today’s business environment. But in reality, they are part of the same whole and are tightly coupled to each other. Without the human factor to contribute to the intellectual capital pool, intellectual capital would exist. The dilemma of measuring or quantifying intellectual capital net-worth is that the methods used to quantify material or physical assets (GAAP) cannot capture the value of non-physical assets. (This would require an entire study and discussion). How can a company quantify the value of their intellectual net worth when the systems used to quantify value are limited to that of capturing material or physical value? Most often the value assigned to non-physical assets is arbitrary—it simply depends on the relevance of such an asset in each given context.

As the intellectual capital trend spread throughout the world, businesses began to deal with the same issues and were confronted with more problems than it was suppose to solve. The support infrastructure that existed in advanced economies such as the US, was non-existent in other parts of the world. Legislation that protected intellectual capital simply did not exist, and where it did exist, the enforceability was insufficient. Confronted with this reality, Asian businesses, in particular, are slowly moving to strengthen local legislation to allow for stricter and more enforceable guidelines to protect intellectual property rights. But much work still remains.

Integral to increasing the intellectual capital pool of organizations is the proportionate increase in human capital investments. The awareness of human capital investments began to catch on in Asia toward the mid-1990’s and has continued to grow since. Consequently, companies began to restructure their specific environments to allow them to maximize their benefit from their human capital pool. But despite the renewed emphasis on the importance of human capital, organizations are still confronted with the challenge of reducing attrition and brain drain.

While companies, focus groups, industry and trade associations have begun to educate the general public on the importance and strategic nature of human capital, there are environmental conditions that prevent organizations to implement and fully realize, much less maximize, on the human capital.

The value of human capital is not measured by the size of an organization’s employee base, but by the quality represented within that employee base. Here again we encounter the dilemma of quantifying value. It is about companies enhancing core competencies, such that their competencies are disproportionately higher than existing market demand. Admittedly, such an ideal outcome is tough to create especially in Asian companies and specifically within Philippine organizations.

The environmental conditions that prevent Philippine companies from maximizing benefits from their human capital investments are systemic in nature. Meaning, these conditions are deeply embedded in individual and collective psyche.

Let’s look into this a little more in detail…

The Philippines in general (private and public) continue to make significant investments into adopting Western management styles, policies, and forms of governance. Such investments are considered necessary for the country to remain globally competitive. Western schooled executives have an established edge over their locally schooled counterparts not because they are less competent or intelligent, but because most progressive corporations hold western schools in higher esteem than local universities and colleges. Board members seem to be more comfortable retaining foreign educated professionals rather than extend the same opportunity to executives with local experience and education. The fact is, expatriates form a larger population of top executives within Philippine companies over naturally born Filipinos. What happens when the economic focus shifts from North America to Asia and Europe (which is imminent)? Will this mean a need for radical change of paradigms on the part of the Philippines?

This reality creates a double standard that inhibits corporations from maximizing benefits from their investments into human capital. While corporations promote western practices, they retain local styles and prejudices.

The cost of labor, for example, within typical Philippine companies are significantly less that any foreign counterpart (with the exception of China). While the workload is relatively similar, the compensation remains inconsistent with the organizations declarations of valuing human assets. Local corporations will spend more on technology, and less on people. Should there be opportunities for training, corporations will typically bind employees to performance contracts or employment bonds while depressing salary levels. It seems that corporations are intent on squeezing every ounce of creative juice from their employees without proportionately increasing the purchasing power of the same. The rationale behind this is usually maintaining competitive advantage by keeping overhead costs to a minimum. The problem is that most corporations lose a lot more by making investment decisions on other areas of their business. It would have been far more cost effective to invest in the lives of their people.

Our actions speak so loudly that our employees fail to hear what we are saying!

When we do find corporations who value their employees and demonstrate this by improving the lifestyles of their employees, we find them taken advantaged of by the very people who benefit from the company. Talk about a vicious cycle!

Labor laws play a significant role in the systemic problem. Labor codes are clearly biased towards laborers. It offers a level of false security that disproportionately disadvantages their employers and the very community it seeks to protect. Current labor laws revolve around the idea of tenure rather than sustainable value. Given this scenario, corporations end up reducing their exposure by depressing the wages of their people just to limit the exposure to financial risk. Just imagine a company that is in financial difficulty. Should the company decide to lay-off people to survive, it will end up killing itself completely. Instead of protecting and providing a means to rehabilitate itself, labor laws place priority on settling salaries over creditors without regarding the condition of its founders or incorporators.

I can go on and on and on discussing systemic dysfunctions but the objective here is to give the reader insight into the complexity that surrounds the issue of realizing benefits from human capital investments, and what considerations organizations need to be address when it comes to the challenge of realizing those desired benefits.

Given these conditions, how can corporations maximize their investments into human capital?

First, we must qualify what an investment into human capital really means. In simple terms, it is the investment of the company into the intellectual and functional growth of every employee within its domain. This involves creating intelligent policies, a culture conducive to personal and professional growth, functional and theoretical training, mentoring and leadership development, performance incentives, and competitive salaries. The focus of the investment is to create an environment where growth and experimentation are encouraged, an environment that showcases achievement, and environment that molds restrictive mental models into new progressive ones, and an investment in capturing the same for reuse throughout the entire organization.

The following are areas you may want to explore if you intend to maximize benefit from your human capital investments:

1. Modeling Leadership – people will duplicate the attitudes of their designated leaders. Make sure leaders are made accountable and responsible for their own actions, and are willing to do the very things they expect of their people.
2. Intelligent Policy –integrate a reward system into the framework of corporate policy rather than maintaining a purely punitive model. Make sure to integrate the same into performance management activities.
3. Safe Communication – establish “safe communication” systems that will allow people to be heard without fear of reprisals
4. Cross Fertilize Skills – promote a well rounded understanding of operations and functions for every employee by getting people to experience different roles within a department or business unit. This will prevent intellectual or functional atrophy from setting in.
5. Serialized or Organic Promotions – promote from within. Limit the number of outsiders who end up filling leadership positions within the company and make sure that promotions are based on the merit of performance. Don’t promote people to higher levels of incompetence simply because they know, or are associated with, the people at the higher echelons of the organization.
6. Create systems that showcase innovation and knowledge champions – make sure that people are recognized only for performance that goes above and beyond expectations. Remember to be sparing—to much recognition will minimize its impact on the organization.
7. Build systems that promote the reuse and enhancement of knowledge – make sure to build systems and mechanisms that allow knowledge holders to transform tacit knowledge into explicit form. Attrition is a reality that will never leave us as long as choice remains a part of free will. To protect the interests of the company and to prevent the company from being held hostage to the demands of key knowledge holders, it is important that such mechanisms be implemented.

If you wish to know more on this subject please feel free to send me an email at dennis@dbreyes.com. I will be more than happy to be of service.

Until next time...