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How human capital can empower the innovation economy (Part 1)

In an earlier article titled How people management evolved over time (published on February 11, 2021), I explored how people management has changed in lockstep with humanity’s economic evolution from a hunter and gatherer society over the agricultural age and industrial age into the knowledge and information age. We also learned that a people management function only emerged in the late 19th century with the advent of “Scientific Management” as a sub-unit of finance and accounting to administer the payroll and daily wages payout. With the advent of the Human Relations movement in the first half of the 20th century, “personnel” became an independent corporate function called Human Resources and, with the advent of the knowledge economy, focused on ‘talent management.” With the turn of the millennium, most management thinkers agree that humanity has moved into a new economic age, the innovation economy. Today, let’s discuss how successful people management in the innovation economy requires a new perspective on how to best manage people: human capital.

What is human capital?

The OECD defines human capital as the stock of knowledge, skills, and other personal characteristics embodied in people that help them to be productive. Investopedia offers a comparable yet slightly more financial definition: Human capital is the economic value of an employee’s knowledge, skills, and experience repertoire, including assets like intelligence, education, training, skills, health, and other things employers value such as resilience, loyalty, and punctuality.

As such, the human capital concept regards talented employees and managers as actual assets for a company. Interestingly, however, I noticed that these human assets are not listed in a company’s balance sheet. (And as a creative person, my auto-response to this insight was: Why not?) 

Why is human capital important for driving innovation?

A fundamental assumption of the human capital concept is that all human capital investments increase the productivity, profitability, and growth potentials of an individual, a company, and an economy. So, HC management aims to bring the right talents on board to build a capable, well-aligned human asset base and then invest in further human capital development (such as ongoing training programs and individualized upskilling and reskilling efforts) to preserve and possibly increase its value. 

Human capital is also essential for making a company come up with meaningful innovations in the innovation age. Why? Innovation begins with creativity, with great ideas that flow out of the brains of talented individuals who then collaboratively take action on a worthy idea to transform it into an innovation. And according to the laws of creativity, the deeper the expertise and the broader the general knowledge, skills, and experience repertoires of each talent, the easier it is for them to connect the dots to come up with genuinely exceptional ideas that form the basis of meaningful evolutionary innovations or groundbreaking, revolutionary innovations. And the more innovations its companies produce, the more innovative and prosperous are the economies in which these firms operate.

The advent of human capital raises interesting questions

In recent years, the human capital movement has gained momentum, and rightly so. But to elevate human capital from a buzzword to a workable new people management paradigm for the innovation economy of the 21st century, we need to understand and address several interesting challenges and unresolved problems related to the concept:

  • Human capital migration captures the challenge that many top talents tend to move from rural areas to work in cities and migrate from developing countries to developed countries. While this may be a logical step for the highflier, it is unfair to those rural communities and emerging market countries that provided the talent with foundational education. They suffer from a brain drain that further limits their economic development potential and to be able to offer attractive conditions that may convince their brightest minds to stay. 
  • Low employee loyalty and high employee turnover pose a comparable challenge for companies who invest in human capital development (training programs, upskilling courses, etc.) only to see their employees leaving for a competitor that offers them a higher salary to benefit from their newly gained skills without paying for the training itself.
  • Our education systems were originally designed to meet industrial age companies’ needs. Nowadays, they continue teaching some outdated knowledge and skills, which constitutes another big challenge for the full advent of both human capital management and the innovation economy. In particular, many experts lament that many fresh graduates entering the job market lack digital know-how, entrepreneurial skills, and comprehensive cognitive skills, all of which are needed to succeed in the fast-changing, complex modern innovation economy.
  • Here is another interesting dilemma related to human capital: Those who invest in early-stage and university education of a “human asset” (often the family or in some developed countries the state) don’t get a direct financial return on their investment. Put differently, companies go on a free ride by enjoying the benefits of acquiring educated human assets to work for them without having to pay for their primary and secondary education. Now managers may rightfully argue that companies pay salaries to their employees and taxes to the government. However, these payments are still not compensation for upfront education investments. Instead, they rather constitute an equivalent for the actual work performed or for a government providing the infrastructure and stability needed to do business. 
  • Another challenge is that experience often isn’t properly accounted for adequately in human capital. For example, suppose you’re a junior corporate banker experiencing a loan default for the first time. You can count yourself lucky if an older colleague can guide you while going through a client’s bankruptcy proceeding. Why? In a long career, a corporate banker typically has to deal with a couple of loan defaults cases, so your elderly colleague can advise you on the proper legal steps to take and traps to avoid.
    Unfortunately, many companies have begun “outplacing” their experienced managers and employees to save cost, which will lead to a dangerous “experience drain” further down the road. Effective human capital needs a healthy mix of generations, and a long work life full of experiences can make as valuable contributions to the bottom line as the latest know-how.
  • Finally, an alleged human capital challenge is “the war for talent”. In a book of the same title, Steven M. Hankin and his co-authors maintain there is a shortage of talent and that companies need to fight to bring top talent on board. While this argument may be true for a few professions requiring deep, specialized know-how, I argue that the “war for talent” is a myth. The real issue here is companies’ inability to recognize the true talents in their employees and use and develop them accordingly. Here, a cognitive test like our TIPS talent & innovator profiling system may help companies better understand their human assets’ talent nature. Then, they can upskill and reskill them to further their natural strengths (instead of sending them into futile training courses geared towards improving their weaknesses).

Interim conclusion: Human capital is a promising concept with some challenges to resolve

Today, we learned that human capital management is a promising approach to provide the innovation economy with the human assets that it needs to churn out meaningful innovations that drive the prosperity of individuals, companies, and economies alike. But we also saw that to bring human capital management fully to life, we need to address and deal with some significant challenges related to the concept. In two weeks, I will share with you a creative solution that I adapted from another area that promises to resolve most of the challenges related to the human capital concept and to be able to fairly reflect the investments in human capital in the accounts of individuals companies and countries.

  • I discuss humanity’s economic evolution in detail in one section of my upcoming book, “The Executive’s Guide to Innovation” (click here for more information and preorders).  
  • Would you like to learn more about TIPS, our talent and innovator profiling system created to empower human capital in the innovation age?
  • How can we support you in your efforts to get your business ready for success in the innovation age? Contact us to jointly explore how Thinkergy may help you deliver on your innovation agenda in 2021 and beyond.

© Dr. Detlef Reis 2021. This article will be co-published in the Bangkok Post in the coming weeks.