Organizations today frequently tout that their people are their most important asset. But to financial accounting departments, is that true? Driven by a need to please and prioritize the needs of investors, talent is often put on the back burner. Peter Cappelli, George W. Taylor professor of management at the Wharton School and director of Wharton’s Center for Human Resources, explores this “penny wise and pound foolish” concept in his book, Our Least Important Asset: Why the Relentless Focus on Finance and Accounting Is Bad for Business and Employees.

In a fireside chat at From Day One’s December virtual conference, Cappelli made the case that financial accounting, as practiced today, undercuts all the evidence about what works to improve the quality, productivity, and creativity of workers. But why did this happen–and what can be done to reverse the trend?

Playing to the Scorecard

The problem with financial accounting departments having a say in hiring and management decisions is that the nature of their work means their priorities are elsewhere. “Financial accounting is the language of investors. It is the scorecard that tells you who’s winning and who’s losing,” Cappelli said. “So you’re playing to the scorecard” if you let balance sheets alone determine your practices.

While all companies want to succeed financially, incorporating financial jargon into leadership decisions that involve personnel can muddy the waters. “There are quirks about financial accounting, which set the rules for the language that determines how well you’re doing. This can really disadvantage anything to do with employees in particular, and people in general,” Cappelli said. People management is far more nuanced than, say, generating a budget.

Impact on Recruitment and Performance Management

Cappelli developed his interest in this topic as he noticed certain trends while writing a different book about modern HR management. He noticed that many modern organizations he surveyed didn’t necessarily have a traditional hiring system in place, and weren’t tracking the effectiveness of job descriptions, where applicants were coming from, or how exactly they were qualified. “They didn’t do sophisticated tests or anything where they decided that based on your record, it looks like you could do this job,” Cappelli said. “We [the company] may interview you, but we do it really inappropriately. And we're just going with our gut.”

He found there was little thought given to tracking the success of the process, only the financial impact. “What do we track? We track cost per hire, and time to fill positions,” Cappelli said. In other words, just the financial factors. “We don’t track quality of hire.”

This extends far beyond the hiring process. “You can do the same thing with how we manage performance, performance appraisals, and training.” Cappelli became concerned when he saw how many organizations “worry about cost per hire, not quality of hire.”

Employees as Assets

In speaking with accounting colleagues, Cappelli began to understand why this is the case. Employees can’t be assets to financial accounting departments because from that strict perspective, they are not owned by the company and therefore there is no way to put an accurate dollar amount on human capital. Companies that need to prioritize the needs of investors therefore find themselves with a shifting approach to HR. “Investors who are looking at contemporary companies, where the assets really are human, come away and say, ‘I don’t know anything about the value of this,’” Cappelli said.

While training might be seen as a theoretical investment in employees, it’s not a literal one. It can’t be tracked. It often ends up on the company budget along with coffee runs and office supplies, Cappelli says, so even the investors who do believe in the value of training programs can’t find them or track them in the bottom line.

Focusing on the finances and little else can impact an employee’s security and well-being. Cappelli shares the example that if a company is measuring success on a cost per employee basis, it could instantly prove itself more successful by reducing the talent headcount, changing the ratio in the process.

Additionally, organizations that offer unlimited vacation time opposed to a set amount that is owed (and tracked financially), can remove vacation as a liability on the balance sheet–and employees might be more reluctant to take it in an effort to prove their value. Moderator Andy Serwer, editor at large at Barron’s, calls unlimited vacation time “a wolf in sheep’s clothing.” The more organizations see employees and employee benefits as fixed costs, Cappelli says, the more they will work to reduce them.

The Greater Impact on Efficiency

While all of this may be done in the name of efficiency, that is often not the end result. “The thing that’s maddening about these approaches is that none of this is about efficiency. This is simply moving costs from places where accountants can easily see it to places where they don't easily see it, but it still matters,” Cappelli said.

He notes that high employee turnover actually costs money, as it’s expensive and time consuming to replace people, and then takes even more time for their performance to get up to par. But this nuance might be buried in a balance sheet that simply shows a newer employee with a smaller salary replacing the old one. “If you’re concerned about economic efficiency, this is a terrible thing,” Cappelli said. “Accounting is imperfect, particularly with respect to human capital, and it’s leading to these distortions.”

Who is doing the hiring has also been impacted. “One of the weirdest things in hiring is that we have gotten rid of recruiters,” Cappelli said. “But recruiters are relatively cheap,” Cappelli said, and more equipped to do the job correctly. Plus, adding on the task of hiring keeps department managers from “doing the important stuff,” yet another unnecessary waste of valuable time and talent. To a CFO, though, Capelli said, “it would look great. You don’t see the cost of hiring badly. You only see the cost of hiring cheaply.”

The impact of a squeezed, cost-cutting working environment can be seen in productivity. “Productivity in the U.S. has been flat for the last 15 years,” Cappelli said, as white-collar workers are expected to work longer hours for less pay, leading to diminishing returns. European working models, with more guaranteed vacation time and fewer working hours, are ultimately more productive, he says. “What we are doing is not good for the economy and not good for society,” he said. “It may just be good for the appearance of financial accounting in companies right now, not even in the long term.”

But there is hope: Cappelli says there is a proposal in front of the Security Exchange Commission to get companies to be more transparent in their actual investment in human capital, requiring them to disclose turnover rates, investments in training, and the statistics of the workforce. As investors continue to put pressure on financial accounting departments, they will be forced to truly value talent as a critical asset for success.

Katie Chambers is a freelance writer and award-winning communications executive with a lifelong commitment to supporting artists and advocating for inclusion. Her work has been seen in HuffPost, Honeysuckle Magazine, and several printed essay collections, among others, and she has appeared on Cheddar News, iWomanTV, and CBS New York.