The New Balance Sheet

Abstract

Throughout previous centuries, when investors bought into a company, they assessed the relative value of the tangible assets and the firm’s ability to generate additional wealth using a variety of mechanisms such as the price-earning ratio. The common perception was that a firm with more assets meant a greater generative capability; therefore, a bigger firm laden with tangible assets was better. Adam Smith’s and David Ricardo’s theories that value was a reflection of the labour required to produce a product were balanced against William Jevons’s idea that value was derived from the utility of the product represented by consumer demand. Both ideas seemed plausible and correct, each providing an explanation that value, to most companies, came from tight cost controls and a fat marketing budget. However, throughout the last twenty-five years, the true nature of what generates value is slowly becoming clearer to both investors and management teams: people or human capital, which can be described as assets consisting of knowledge, skills, ideas and talent, indeed plays a much larger part in corporate success than previously imagined. In 1995, the Brookings Institution indicated that there was a measurable shift from tangible assets, which represented 62 per cent of a company’s market value in 1982, to intangible assets reaching that same level by 1992.²

There are no recipes or formulas, no checklists or advice that describe ‘reality’. There is only what we create through engagement with others and events.¹