Wow, that is an understatement. Some things change faster than others, but that does not mean the slower change is less significant. In 2003, Erik Brynjolfsson, an MIT professor, first suggested that the breakdown in company valuation, such as in the stock market, was 10% IT capital, 15% technology complements, and 75% intangibles organizational assets such as human capital, business processes, and culture. A few decades ago, the opposite was true; two-thirds of the valuation came from “stuff”. That certainly seems a lot of weight placed in the value of a company solely on intangibles; for every $1 of valuation, 75 cents comes from people-generated assets. Now, theoretically, this is what many HR professionals professed, and yet, the doubts remain, or have they?
In an article in The Economist (July 27, 2020), Meet the New Boss, Professor B’s assertion is coming full circle. Thirty-two percent of firms in the S&P 500 invest more on intangible assets than physical ones, and 61% of the market value of the S&P 500 sits in intangibles such as research and development (R&R), customers listed by retook effects, brand, and data.
If the valuation of companies leans more towards those intangibles, arguably, people assets, then why shouldn’t more companies invest in their people over their material assets? For example, one of the largest content providers, Facebook, does not own content. A large, successful transportation provider, Uber, does not own any cars, and one of the largest lodging companies, Airbnb, does not own any property.
When we discuss companies such as Amazon, Facebook, and Bank of America as successful companies, many feel they cannot compete with these companies. They think they don’t have the resources to maintain such a competitive advantage; however, these great ideas and backing data made these companies great, not the other way around.
The conclusion of the Meet the New Boss article suggests that leaders who lead into the future must be more connected to the intangible side of the business than in the days of Jack Welch and his cut-throat practices. Empathy and compassion will rule the day as they become the new leadership characteristics of the 21st century. Are CEOs, CHROs, and CIOs ready to lead in such a way?