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CHAPTER ONE INTRODUCTION
1.1 BACKGROUND OF THE STUDY
It is being increasingly expressed by professional accountants, institutional investors, and e-accountants, especially of the new knowledge economies, that new financial and management accounting concepts and practices need to be established, to acknowledge the Human Capital of a business enterprise. Whether it is in manufacturing, service or technology, the value vested in human capital cannot be ignored. This concept of measurement and management of human capital costs is also gaining importance in the service industry, amongst which are: insurance companies, banks and high technology-based companies. People from different industries, companies and backgrounds agree that the time to focus on human capital and related issues has come (Chen and Lin 2004). The main goal for any business is simple: Invest capital so that it maximises shareholder value. However, in modern times, this is a necessary but not sufficient condition because execution of successful strategies depends on access to intellectual and operational know-how, customer and supplier relationships, a committed workforce, and other such intangibles. At the heart of making these intangibles come alive is the firm’s investment in human capital. As Carnegie (1919:3) puts it, “The only
irreplaceable capital an organization possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it”. It is logical therefore that competitive age in the 21st century has shifted from process and technology to quality of human capital. However, relatively little is known about the valuation, measurement and reporting of human capital. This could be explained by the complexity of the issue. For instance, ownership of human capital cannot be enforced because employees are free to leave at will. It is important to note that even as employees can leave at will, their exit will still leave with the organisation the impact of their existence. Also, investment in human capital involves a great degree of uncertainty about the financial and operation success of those activities. Hence, under generally accepted accounting principles, all human-related expenditures are treated as expenses, which are deductions of revenues, thus misleading decision-makers into inappropriate judgments.
For years, companies have rigorously measured key areas of their operations from the success rates of new product introductions and productivity of manufacturing operations, to direct mail conversion rates and customer retention. The reason is obvious: Bringing desirable new products to market, squeezing the most from one’s physical assets, and gaining and keeping customers are all critical factors in a company’s
success. However, without concrete human capital performance measures, effective management of these areas would be impossible.
Thus, while measurement of supply chain, research and development, and sales activities has continued the same for human capital developments has remained comatose. This was not particularly problematic in the days when competitive advantage was defined by one’s physical assets or proprietary products, and people were merely replaceable parts in the organizational machine. In today’s global economy, particularly in the service industry, where knowledge and information are very crucial to their very existence and survival, human capital is gradually assuming the characteristic of “product”. In the process, a company’s workforce has evolved into arguably the biggest competitive differentiator for organizations in virtually all industries especially the service oriented industry which banks fall.
The simple fact is that the most successful organizations today and in the foreseeable future will be those that are able to measure the business impact of their investment in people whether that investment is employee recruiting, performance management, skills development or benefits administration.
Unseen Wealth (2000) asserts that firms with the most highly educated workforce enjoy above average productivity and profitability. No
wonder that the issue of human capital development has continue to be important and how to maintain or enhance its value a topical issue.
In Nigeria, banks are reputed as one of the fastest growing sector in the financial service industry in the country. They have also earned themselves the reputation of the sector with the highest yearly recruitment in the industry if not in the economy at large and also have a good compensation package for its employees. The sector has graduated from semi skilled labour driven, to a more professional and skilled workforce, where people who are highly educated and skilled are considered most appropriate for the sector.
While banks have traditionally emphasized shrewd use of financial assets, the increasingly competitive global marketplace is causing financial institutions to take a fresh look at the way they manage human capital. The goal is to attract, develop, and retain valued people while ensuring efficient use of human capital.
1.2 STATEMENT OF THE PROBLEM
The new knowledge economies have highlighted the importance of human capital and the imperative need to measure and manage their associated costs and benefits. Human capital represents the knowledge, skills, and competencies of employees that allow them to be productive. It contrasts with ordinary physical capital such as buildings and information
technology (IT) systems. Banks and financial institutions, which are rich in human capital and face great ‘human capital-walk outs’ should be concerned with measurement of the cost of this unique asset. It has become a common phrase included in banks annual reports and accounts that; “Our employee are our greatest asset”, yet there have not been adequate attention given to the value and contribution of this “great asset” on the overall performance of the banks.
When companies invest in physical capital; they try to select alternatives offering the highest return on their investment. They would also like to invest in human capital offering them the highest return. Traditional accounting methods, which are based on tangible assets and historical, transaction based information are inadequate for valuing intellectual capital of which human capital is one. It has become therefore imperative for firms to development methods of valuing their human capital and its impact on it performance, if it would continue to be relevant in the ever competitive knowledge-based economy.
1.3 OBJECTIVES OF THE STUDY
The broad objective of the study is to assess the impact of the investment in human capital on the performance of Nigerian banks. Specific objectives are:
1. To assess the impact of human capital development on the Net Book Value of Nigerian banks.
2. To assess the impact of human capital development on the Earning per Share of Nigerian banks
3. To assess the impact of human capital development on the Market Price per Share of Nigerian banks.
4. To assess the impact of human capital development on the efficiency of Nigerian banks’ employees.
1.4 STATEMENT OF HYPOTHESES
Ho1: Human capital development has no significant impact on Net Book Values of Nigerian banks.
Ho2: Human capital investment has no significant impact on Earnings per share of Nigerian banks.
Ho3 Human capital development has no significant impact Market Price per share of Nigerian banks.
Ho4 Human capital development has no positive impact on the efficiency of employees in Nigerian banks.
1.5 SIGNIFICANCE OF THE STUDY
Considering the subject of the study to be a topical issue in the accounting and finance circle, it will have immense benefit to the following: Banks – who will need this study to understand the nature of their human capital development and how they contribute to their bottom line.
Shareholders - will use the research to understand how to determine which bank to invest in considering their return on human capital.
Researchers – will find the research very important considering its novelty, and will help in further research.
1. 6 SCOPE OF THE STUDY
The study covers the banks that met the 2005 CBN consolidation and quoted on the Nigerian Stock Exchange. It does not cover community banks, development banks, mortgage banks and the supervisory authorities in the banking industry. The study will cover a five year period between 2005 and 2009 inclusive.
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