Thursday, October 18, 2007

Tentative Thoughts on Human Capital Allocations

One of the themes coming out of Amity Shlaes masterful treatment of the New Deal, The Forgotten Man, is that destabilizing and counterproductive behavior has consequences in the investment world. This principle can often be seen today.

On a national level, take Iceland, please! (Any Henny Youngman fans out there?) Not only is Iceland tied for first worldwide in the 2006 Transparency International Corruption Perceptions Index, (see, it also has taken steps to reduce corporate tax rates, thus inducing investment and growth in that country. (For a prior blog on that topic, see To my pal, Einar, I still owe you a beverage!) In contrast, the perennial bottom dwellers include nations where instability abounds, portending ill treatment of foreign investors as well as natives.

In the nonprofit realm, we don’t usually think of profit as being a driving force behind what we do. Nevertheless, investment is ubiquitious and institutions of all kinds depend on it. Such investment may take the form of donor capital, where the investment is driven by the desire to achieve a particular outcome, such as educating the ignorant, feeding and clothing the poor, or providing care or comfort to the sick. But those outcomes require a commitment from people, either volunteers or employees. This requires human capital.

Human capital investment has both monetary and nonmonetary dimensions, as people are motivated by many different features besides the expected monetary return on their labor. True enough, we work so we can earn a living for our families, which takes money. But many of us work for other reasons as well, including a quest for meaning and the satisfaction that comes to us from a place in a vibrant and creative community. Surveys suggest that money is not the main reason people leave their jobs. Instead, things like having a bad boss or meaningless work drive such decisions.

Leaders of nonprofit organizations can have a significant impact on whether people choose to invest or not. Moreover, once they are employed, those leaders can have a significant impact on their continuing level of commitment – or investment if you will – with regard to the enterprise.

For these purposes, I would also suggest that the investment of human capital is not static, but variable over time. Stated differently, the number of employees does not necessarily measure the total human capital investment. Though we might look at this through the lens of productivity or output, it is also possible to conceptualize the investment as something that can be withdrawn and redeployed, at least in part. For example, one might withdraw capital without terminating employment by ratcheting back one’s commitment or output, and redeploying that energy into other things, whether it be “moonlighting” or other nonmonetary pursuits like family, charity, or hobbies.

Labor unions may engage in a “slow-down” to signal management that attention is needed. However, in nonprofit institutions or other enterprises where output is not easily measured in dollars, it can be hard to measure whether capital has been withdrawn in this manner. Ultimately, dollars may be impacted, but the impact may not be felt until much later, when the quality of institutional success is ultimately felt. Just like the knowledge firm who cuts back on R&D to boost profits, it can be an effective strategy in the short run, but in the long run the firm will ultimately lack a saleable product.

Conversely, additional investments may also occur without adding more employees. A bonus or a kind word can induce behaviors that ratchet up commitment, and thus induce deposits. These additional investments are commitments of scarce resources that are likely not based on pure altruism, but are likely to be based on the individual’s perception about the returns he or she will derive from the commitment, whether monetary or nonmonetary in nature.

Though there are difficulties in monitoring investments and withdrawals of human capital, we can readily identify behaviors that induce investments or withdrawals. Such behaviors are likely to be quite similar to those that induce financial investments. Factors such as transparency, which are so valuable to other capital investments, are also important to human capital investors. Developing an environment of open and honest communication fosters trust, which is very important. Communication can also create a sense of shared enterprise, which brings those other nonmonetary values into the calculus of investment commitments. Conversely, dissembling and untruthful communication, hidden favoritism based on politics instead of principles, and a failure to recognize positive achievements, drives out investment, even when employees choose not to leave the building.

These behaviors and to feedback mechanisms and metrics for measuring output in nonprofit organizations, both at an institutional and at an individual level, deserve greater study. Unlike markets, where we can measure results quickly in dollars and other quantitative metrics, we lack similar metrics that fit all of the products or outputs of an institution. Sadly, poor qualities in institutional leadership that cause human capital withdrawals may occlude effective measurement on an informal basis, such as through communication with colleagues and subordinates, thereby preventing appropriate adjustments. We cannot escape markets, even in the nonprofit realm.



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