The current credit crunch has occurred because banks have failed to distinguish between their role in creating wealth by lending, and their greed in trading utilities

The Credit Crunch and true Asset Management


The current credit crunch has occurred because banks have failed to distinguish between their role in creating wealth by lending, and their greed in trading utilities. This is no time for either novices or jokers, but I am reminded of  an old joke about a couple of Jewish tradespeople.


Abe goes to David and offers him a special deal of  10 gross of tinned sardines. After some bargaining David's offer of £25 per gross is accepted. Soon David is on the phone to Levi. Levi offers to pay David £31 per gross, and David arranges delivery to Levi's home. When Levi arrives home that evening the sardines have been delivered and are in the garage. He asks Rachael, his wife, what's for dinner. She says "I couldn't get to the market, so we're having a couple of cans of sardines that you've got in the garage."


The sardines are served up, and they are foul! Levi immediately gets on to David. "These sardines," he says, "they are schtinking, they are off, they are terrible!"


"Oh Levi," responds David, "those sardines aren't for eating - they're for trading!"


So it seems are mortgage packages that the Banks have been trading among themselves, no one ever seems to have tasted them to feel the quality. Only the width mattered. For trading in, that is.


And so we're back to a topsy turvy world where the problem caused by over generous lending is being cured by further lending to stimulate the economy, with the people whose bad borrowing records were at the root of the collapse now being encouraged to borrow more, so that the economy becomes stronger. Wow!


Meanwhile, it appears that one of the ways to strengthen the economy is for companies to shed their workforce. That makes the companies less able to cope with the increasing demand the government seems to expect will happen by lowering the interest rates, and adds to the general distress.


Moreover, by making them unemployed, they are less able to participate in the economy and so make recovery a more distant prospect.


But that's where we find the fundamental misconception built into the whole economic system - people are costs!!  Whereas items of machinery can be bought, and even be put into mothballs, while sitting on the balance sheet enabling companies to raise loans against them, the people who have been carefully selected, trained and enticed into an organisation, are regarded as costs, and so must be eliminated as quickly as possible as soon as there is a downturn.


This nonsense is something I've fought against for the whole of my career in industry since the early 1960's.


Some sixteen years ago I prepared a paper for discussion at a meeting of the Christian Association of Business Executives, and it generated some satisfying discussion, but the conclusion I was left with was "there's nothing we can do!"


Well I feel like Jesus in the temple trying to knock over the tables of the money changers (not 'money lenders') but let me here reproduce the paper I presented in 1992.



"Valuing your Greatest Asset"




Michael J Davis BSc(Eng) MBA MCIM


October 6th, 1992




God & Mammon


When high priests of both Mammon and God use the same words concerning a serious issue, it is worth exploring further.


In his 1992 annual report Sir Richard Greenbury, Chairman of Marks & Spencer plc, states that staff "...represent the most valuable asset of the business". If we search the accounts for further indication of this sentiment, we find this "asset" is represented only as a cost of £696 million (12% of turnover). Taken literally, he means that other assets which include £2,359 millions of land and buildings are, presumably, less valuable. In short, he is valuing his employees at something like four times their annual salaries!


A similar expression, "..the people - who make up the firm's most valuable asset - .." was used by Pope John Paul II in his 1991 encyclical "Centisimus Annus" which concerned the relationship between the individual and the capitalist society following the fall of communism.


No doubt Sir Richard, if challenged, would plead poetic licence; but he makes a valid point. For without the people, M&S could not carry out a business which justifies the holding of billions of pounds of fixed assets.


Sir Richard is saying, in effect, that the accounts do not show the "true and fair" view that accountants seek. It is certainly our common experience that quality of staff makes some companies a pleasure to deal with; in this, I would certainly include his.


Even more important are those employees whom we do not meet, but whose workmanship determines our satisfaction with the product or service we purchase. These are true assets, to whom the discerning customer returns.





In my career in British industry, both as an executive and as a consultant, I have seen the way decisions are made. Decisions which affect the future of companies, decisions which affect the products and services provided by those companies and decisions which affect the employees within those companies.


When working for Public Groups, pressures are applied by the stock market, through brokers and analysts who have to be kept informed. They influence the market's expectations of company performance - predominantly its profits and dividends - but clearly all the factors contributing to its results and which are revealed in the annual report and accounts.


The public commentary relates, though, to those items available for scrutiny in the financial accounts. Consequently, it is these which are controlled most closely by the Board.


Within the companies, of course, the management accounts differ from the public financial accounts. The basic controls, whose detail reflects the nature of the individual businesses, show how local management are meeting the group's targets.


Having worked at senior levels within public companies from 1967 to 1986, I have seen how difficult it is for companies to relate their manpower needs to the ultimate profit of their groups. Only when profits could be related to the output of each person on the shop floor was the person valued for their efforts.




Let me cite some examples. There was a property boom from the mid-seventies to the mid-eighties. Because of this, manufacturing companies found it better to convert assets into buildings, new head offices, for example, than into machinery. In some cases it appeared better to close old factories and build industrial estates on the site, because more profits could be made on the property than on the manufacturing assets.


This was partly because the property, for all practical purposes did not represent a significant expense in the accounts - indeed, it could be revalued. Machinery, on the other hand, was depreciated over five to ten years, while the training of employees was written off immediately!


A scandal of the sixties revolved around "Centre Point" in central London. This building was kept empty (with, then, no rates payable) because it appreciated faster than the rents it would have generated.


Jim Slater of Slater Walker made millions in the sixties and early seventies by buying industrial companies, closing down the manufacturing operations and selling the sites at vast profits. Sir James Hanson still does the same, but may be better at keeping the rump businesses going. However, the real profits come from the asset disposals rather than from real growth of the acquired companies.


When BTR made its abortive approach for Pilkington a few years ago, one of the ways it proposed saving money was to cut back on Research and Development. R&D is another area where the people costs (and related overhead) can be disposed of, thus improving the accounts, often many years before the effect of losing such value is noticed.


Now I am not defending inefficient management, for badly run companies deserve such unwelcome attention. What I do query is that human assets are allowed to go unnoticed, simply because they do not appear in the accounts.


Shareholders don't ask questions whether the skills which were dispersed could be used more profitably, because there is no way of valuing those skills in the accounts. They do not get a "True and fair" view.


My argument then, is that human "assets" are wasted because they are not shown in the financial accounts. Because they do not appear in the financial accounts, the management accounts generally assign lower priorities to them. As a result, when a company comes under pressure, it will shed people as "costs" because it comes into conflict with what the establishment regard as "assets".


Can it be done?


Can we show employees as assets in our accounts? No! They are not "owned" by the company, and conventional wisdom is that they are both difficult to value and transient. Here conventional wisdom is self fulfilling.


They are difficult to value, precisely because no attempt is made to value them. As a result of failing to value them, they are transient, and frequently disposed.


I wager that Alan Bond, when he purchased Van Gogh's "Irises", did not say to his financial director, "As it is difficult to value works of art, we had better not regard it as an asset!" No, he promptly went to the bank and raised a loan against its value in his balance sheet! (Not that it did his subsequent fortunes any good.)


Were employees to appear in some form on the balance sheet, the Managing Director would review the value of the employees almost as frequently as he reviews the trading accounts. He would query how their value could be enhanced. So would the shareholders. Even if banks were initially reluctant to lend money on their value, they would soon learn to recognise that the more valuable the employees, the more responsible the company. Indeed, it would do many banks no harm to value their own employees, rather than to chuck them out on the street! Then they too would recognise the inherent values of their customer's staff.


Is there a way? I believe that there are several possibilities:


Capitalise Training


A first step could be to capitalise the cost of acquiring and training personnel. Expensive "head hunted" executives would mirror the effort put into their search and perhaps reflect their scarcity. The cost of training courses would enhance the company's balance sheet, being merely a transference of assets from cash to a less tangible asset.


Naturally, such expense would be amortised and, were the employee to leave, the whole expense written off. The effects of this could be, at least, a lessened reluctance to train, while the costs of finding the right man would not be compromised by the apparent cost.


Capitalise Contracts


An alternative would be to permit the value of the employee contracts to enter the books, perhaps through some percentage of the annual salary.


The effect of this could be to encourage companies to tie down their most valuable employees under stricter contracts - since the effect of their leaving would be to strip the company of both their talent and their value. This would be overcome by permitting trading in contracts. Since it may also lead to inflation - Directors wishing to enhance the value of the company, while staff wishing to be more highly paid - would remove natural checks, it may be subject to criticism, and thus thought would need to be put into control.


Auction Scarce Resources


Another way to obtain the advantages of "people value" within a conglomerate is to auction skills. (This was put forward in an article in Harvard Business Review, Jan 1967.) In this way the division which values that person most highly, would be the one which expects to achieve the greatest return on that person. Such bargaining would be managed by a "central banker" to the benefit of the Group and its shareholders. The logic of the market place, in theory, ensures best utilisation of scarce resources, but is hypothetical while confined within a company.


Emotional Reaction


No doubt some will react emotively by talking about "slavery" and "reducing people to commodities". They would be wrong. Legitimate emotion is due concerning the present situation where people are "valueless" and trashed when they appear to be of no use to the company. They would also be wrong, in that it is not people who are being valued, but the worth of their training, or their contracts.


Already Done


Accountants may be forgiven if they regard the proposals as unworkable.         


Some may be astonished to learn that there are public companies who already put some of the suggestions into practice with the blessing of the profession.


I refer, of course, to football clubs. The latest (1992) accounts of Tottenham Hotspur plc show assets which include £9.8 million of players' contracts. (Since the end of the financial year, sales of £8.15m contracts have taken place, including the much-publicised £5½ million transfer of Paul Gascoigne, while purchases of over £6million worth of players' contracts were made.) These are amortised over the period of the contract. The trading in players is well publicised; Spurs showed a small loss in player trading in the year.


Let us examine what happens. Note that it is the players' contracts that are valued, not the players themselves.


The club capitalises the purchase price of the contract, and amortises it in accordance with FA/UEFA guidelines, which I understand to be straight line depreciation between price paid and estimated residual value at the end of the contract term, obviously a young talented player will not depreciate as fast as an older player. Where players are discovered and signed by the club, no value can be put on them by the original club. They can, and will of course, show a profit by selling the contract - called "transfer fees". Naturally, losses on player trading are also possible.


Why isn't this done for everyone? Because players must be registered with the Football Association, (i.e. be professionals) for these rules to apply.


A football club, then, has the opportunity to make money by providing entertainment - and we must assume that the higher the league, the bigger the gates, the greater the revenue and, one hopes, the greater the profits. Alongside this is the opportunity to sell related products, souvenirs and the like. In this, it is no different from any commercial company with both main and related product lines.


Clubs can also make money by finding and signing players, training them and selling their contracts. It is this aspect which is not paralleled elsewhere in industry. There, we frequently train key employees only to have them poached by competitors who have not had to stand the cost of training.


Can we all do it?


If this form of trading in human assets - naturally, with their agreement - is acceptable to the football industry, then in principle it can apply to any of Marks & Spencer's' human assets. Thus benefiting British Industry.


So what would be necessary for this? Learning from the football industry, I believe there are three factors.


a) Firstly, some form of registration of our "players". This is already practised by many of the professional institutions. For instance, the BMA registers doctors and strikes them off if unprofessional. So Accountants themselves could jump on the bandwagon, followed by Chartered Secretaries, then my own professional institute, the Chartered Institute of Marketing, would no doubt wish to register its "players".


With the onset of NVQ's, themselves an excellent basis for qualification, certain Trades Unions would see the advantages of such registration, though I hasten to point out that I am not proposing a closed shop, merely formal registration of professional people before contracts appear on the balance sheet and for trading in such contracts legally to occur.


b) Secondly, that the costs of formal and relevant training of registered staff could be capitalised. In this way, companies would be encouraged to increase the value of their employees - as training would enhance the employees value to the company (i.e. make them more useful) while not showing as a cost in the Profit and Loss account.


c) Thirdly, permit trading in such contracts, so that, having trained staff, their "market value" could be recovered by the company. Simultaneously, would be the ability to capitalise employee contracts and other recruitment costs. It is clear that the registration bodies may be required to monitor this, if only for auditing purposes!




Because we cannot foresee an overnight change, we must set the trend in motion so that the system cannot be by-passed, and there are advantages to all in adopting it.


Initially, the system can only be applied to the scarce resources. There would be little immediate advantage in capitalising "common" resources.




a) To enable accounts to show a true and fairer view of a company's worth, which takes into account their "hidden" assets inherent in the value of their personnel contracts.


b) It would encourage management to look more closely at the human assets and set up appropriate controls to ensure that their value is retained in the company and enhanced by appropriate training.


c) The "head hunting" could be done in a more open way, with some companies concentrating on making money by their provision of experience and training, while others perhaps faster growing could save money and buy in skills as required.


d) The concept of registration would be essential to the process, with qualified personnel deciding to be registered - probably by their professional association - and thus being subject to the "system" of valuations. This is what happens at present within the football industry.


As a registered professional would not be possible to resign one's job and join another company for the personal benefit of a golden hello. To do so would be to forfeit one's registration.


e) Advantages to the company include:


Training and development costs can be capitalised, thus keeping the value within the company.


Contracts show as assets on the balance sheet and money could be advanced against such assets.


f) Advantages to employees would include:


          1) Tendency towards longer contracts means greater security of tenure, and longer notice of disposal. Alternatively, the value of the employee means that the employer is motivated to assist the employee to find another job so that some capital value of an unexpired (or residual) contract can be recouped.


          2) If an employee wished to leave to take another job, then it becomes in his interest to obtain a higher valuation for his present employer to make a profit on the transfer.


          3) If an employee wished to leave - not to take another job but, say, because of sickness in the family, then some form of insurance could be offered to the employer to cover the depreciation or termination of the contract. This may be offered through the professional institution who would require to register this; In effect, the registration council would "buy back" the employee. (It is in the employee's interest to maintain registration, so that they may choose to return to their profession.)




We need to consider what could go wrong, and how such a system could be abused, before accepting it as workable.


Ways in which malfunction or abuse could occur include:


1) Employer wishing to dispose of an employee in less than his term of contract. In this case, they would be required either to attempt to find employment, or to pay the costs of employment search. (Perhaps to the Registration council?) This, together with the costs of writing off the capitalised value, represent penalties for short-termism.


Should the employer claim justified dismissal, he would require to prove it to the Registration council; as indeed, with any contract, the employer would before a tribunal.


2) The employee deliberately performing an act to be fired, so that he can join another company and benefit from a sum which should have been paid to the former employer. In this case, the risk must be of being debarred from registration. Then no future employer would be able to place a capital value on any contract entered by that employee - who would be unable to practise as a professional.


3) Employers overstating capitalised costs. This can be avoided by only accepting specific courses, which would require approval by the registration body. This links in with NVQ's as well as professional qualifications, and need not be a problem.


The transfer costs would, in effect, be monitored by the registration councils and by the auditors (as well as inland revenue, of course!)


4) One question is "Will employees expect their salary to be in line with their book value?"   The answer is bound to be "Yes, they will expect it!" But there is no reason why a contract which takes into account the length of service, the price paid, in-service training provided, and possibly the age of the employee, should relate directly to the specific salary paid.





The effects of such policies would be:


1)       To ensure that decisions made about the future of the company, make greater reference to the effect on the employees. This particularly important in connection with training and development.


2)       As the consequences work through, this would engender in employees a greater awareness of the need to be trained and to enhance one's value.


3)       Although initially they will be called "intangible" assets, in due course they will be seen to be as real, for the worth of the company will be seen to be tied up with them. Once this happens, financing will be given against such assets, and the real wealth creation of service companies will be seen.


4)       Will it be inflationary? I don't think so, for it will not happen overnight, and the consequences will slowly be absorbed into our culture.


5)       Possibly there will be a change in the nature of the employment market, for some agencies will see that it may be better to own contracts and lease out the personnel. Equally, some high risk companies may also believe it to be better to hire in rather than to employ scarce talents.


6)       The nature of employment related education may change, with Higher education bodies becoming self funding by signing youngsters, educating them while capitalising the costs, and subsequently selling their contracts at a profit. Perhaps the Government will be interested in this form of privatisation?


Lastly, and best of all, perhaps Sir Richard would be able to see that employees really are his greatest asset!



Michael J Davis BSc(Eng) MBA MCIM


Based on talk given to the

Christian Association of Business Executives

October 6th, 1992



The Author


Mike Davis runs Watchman Consulting, a management consultancy based in Rochdale. A practising Christian, he is active in Church matters, serving on the Salford R.C. Diocesan Commission for Christian Unity, in which role he is a member of the U.R.C. North West Provincial Synod. He is also on the management committee of the Centre for Church & Industry in Trafford Park.




This paper is put forward, not as a solution, but to promote discussion on the true role of people in our industrial society.


He wishes to express his debt to Demetrius Comino, the founder of Dexion, for whom he worked for four happy and stimulating formative years. "DC", as he was known, encouraged employees to challenge conventional thinking as a way to more profitable and more human solutions. It is sad the way that company following a successful public flotation and later acquisition by a private venture capital firm, went the way of many described above.