Investing in Gray Matter: Evaluating a Firm's Human Assets
When an oil pipeline company suffers a spill, it shows up in the next financial report. But when a high-tech firm has its top product development team stolen by a competitor, you may never know, unless you work to find out. The real assets in today's growth companies are human ones.
"My assets walk out the door every night," says one high-tech CEO. "We have to be a good place to work so they'll come back the next morning."
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Investing in Information Age companies calls for a new kind of due diligence from investors. You want to be confident that the companies you invest in have the best people and are taking every step possible to keep them.
Unfortunately, the balance sheets and quarterly reports we use today were developed to describe companies that consider "capital" limited to cash and capital equipment. They tally up the value of hard assets such as locomotives and rolling mills, not the value of gray matter in their employees' heads. Nowhere in a 10-K report do you find even the most basic information about a company's workforce that might give you a handle on its quality: the average level of education, the annual rate of turnover, or any measure of employee commitment to the company.
Here are ways to find out whether a company in which you want to invest has good people, as well as the ability to keep them.
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