- Email: [email protected]
Systems dynamics and human resource accounting
Accouwing.
Organizations and Socierv,
Vol. 1. No. 2-3, pp. 167-174. Pergamon Press, 1976. Printed in Great Britain
SYSTEMSDYNAMICSANDHUMANRESOURCEACCOUNTING" TREVOR GAMBLING U~liversity of Birmingham
Abstract Accountants all over the world are being told that their particular view of the world is too narrow. Within this context. the article reviews the potentialities and problems of Human Resource Accounting, and in passing, critically discusses some previous comments on more general behavioural research in the accounting area. Particular consideration is given to the role which dynamic systems models may serve and the paper reviews some of the author’s initial observations and experiences in the area.
Human resource accounting is by no means a single topic for research. It contains large areas which are not really interpretable in terms of “behavioural science”, while those which can be interpreted in that way can be seen to be very interesting, of vital importance to good management. but whose analysis seems to involve one in most tendentious questions of philosophy, politics and in the end of morals. Indeed, it seems possible to argue that what distinguishes the accountant from other scientists is this very desire to encompass the whole physical and social world in a single all-embracing system of analysis. This is the same sort of claim as Newtonian physics makes about the physical world alone: as is the case with classical physics, a number of points of difficulty suggest that the theories are not quite true - but that doesn’t prevent the general adequacy of the explanations from assisting greatly in the solution of many important practical problems. However, there can be no doubt that at this time accountants all over the world are being told that their particular view of the world is too narrow, and fails to show the influence or even the existence of many factors which are of importance. In particular, critics seem to feel that their analysis is purely economic in its interest and neglects almost all social and behavioural issues. One must ask why it is only recently that businessmen and administrators have come to the conclusion that there was a case for any sort of extra economic accounting. Some might suppose
that it was because our ancestors were a hard-headed and hard-hearted lot whose modus operandi was to grab the cash and let the rest go hang! Even if this were true, it would still require a certain belief about how things worked - a model, in fact. Essentially this would be that markets so that all the effects of any were “perfect”, activity were fairly reflected in the price system. That is to say that there was no discrepancy between the social net product and the private net product and *‘externalities” did not exist (or if they did. they were kept within reasonable limits by law or custom). When Pigou first raised the latter debate it was thought that it was extremely difficult to demonstrate either its truth or error, but now most people need littie convincing of the proposition that the price-mechanism is a faulty instrument at least in an affluent, post-industrial society. Traditional accounting is very clearly based on this perfect market assumption; indeed, one can see that if the price mechanism really could take care of all side effects, a simple listing of priced. first-order transactions would be all that could be said about the activity of an enterprise. Consider how the American Accounting Association Committee on the Measurement of Social Costs (1974, p. 99) neatly limits its remit: “We were concerned fundamentally with first order effects only . . We were not concerned with social costs in the traditional economic sense of Pareto optimality.”
*An earlier version of this paper was presented at the Seminar on Human Resource Accounting held at the European Institute for Advanced Studies in Management, Brussels. The research project discussed is financed by the British Social Science Research Council. 167
168
TREVOR GAMBLING
This leads this committee to confine its discussion to thi: possible need to report on the presence (or absence) of specific programmes initiated by the company in areas like training, community service, environmental and consumer protection; the idea that what the company does in its main production programme is infinitely more influential in alJ these areas (and on “society” in general) can simply be ignored - as second order effects. If it is accepted that the price-mechanism is faulty, so that externalities do exist, the model one is compelled to use to order one’s affairs at any level of aggregation becomes a fairly complex, multi-level, multimedia dynamic simulation. My own research activity in human resource accounting has been in the construction of some models of this type - and my current task is their “external validation”, by which I mean that some models should be so constructed and quantified that it is possible to identify dependent and independent variables and obtain a good “fit” between the predicted and observed dependent variables over a period of time. This apparently straightforward approach would seem to be anathema to another AAA Committee, this time the Committee on the Relationship of Behavioral Science and Accounting (1974, p. 13 l), who voice considerable dislike for such appeals to “external validity” “External validity asks the question of generalizability: to what populations, settings, treatments variables and measurement variables, can this experimental effect be generalized? The emphasis so far (in accounting, not necessarily in behavioral science) has been on external validity and this imbalance has caused some unfortunate side effects.”
The contrast is with “internal validity”, which the Committee seems to equate largely with “rigor” and which they believe resides in laboratory experiments designed to test rather smah segments of a theory as opposed to broader based field studies. It is my view that even from the point of view of high theory, this approach is mistaken; it is the relative significance of laboratory experiments which may distinguish the social sciences from the natural sciences! We can learn a lot from how a chemical reacts under conditions of weightlessness, in a vacuum and so on; how a man reacts in society only has meaning in the context of that which itself provides the taxonomy, society, model, the general Weltanschauung that alone provides any basis for making statements about the
phenomenon at ail. This difficulty is certainly not unknown to the Committee, who say (p. 135) of behavioural accounting researchers: “Unfortunately, too much of behavioral accounting research has consisted of hunting and tracking something without knowing what it was. Perhaps the greatest deficiency in behavioral accounting research is the lack of formul mo&ls. By formal models, here, we simply mean systematic attempts to formulate sets of principles, postulates and hypotheses about relationships among variables which can then be tested empirically.”
Now this demand for a model, and a proper taxonomy for categorizing phenomena is central, or should be central, to what accounting is all about. However, both Ricco Mattessich and Orace Johnson have claimed that accountants are far too little concerned with such matters. I have said elsewhere (Gambling, 1974a) that the present fragmentation of “the social sciences” is a splendid device for categorising (and perhaps therefore devaluing?) other people S problems. This makes it possible for economists to have their model and an attendant taxonomy, social psychologists another, political scientists a third, and so on. Quite often, wili be describing the same these people phenomenon, but in quite different ways. This may be fair enough in an abstract sort of way, but the problems become very great when one tries to bridge the gaps between two or more disciplines, or in more concrete terms, if one wants a model of the workings of a society or social subgroup 11sa whole. Because real-life problems are strictly meaningless apart from their context in society, the businessman, the statesman and the administrator are rarefy in a position to carry out controlled experiments, and the accountant is right in there with them, providing control data data about a dynamic and decision-making situation which unobligingly wanders over the whole gamut of social science, economic, political and behavioural. This suggests that the data for external validation must be obtained from some overah picture of the situation of the entity as a whole - in effect an accounting system. The general feeling that accounting is failing to include noneconomic factors has tended to crystalise into demands that accounts should reflect greater concern for human factors of production, on the one hand, or alternatively that it should set out what the enterprise is doing (or not doing) for “society” - usually in those areas where externalities to the price system are
SYSTEMSDYNAMICSANDHUMAIIRESOURCEACCOUNTING
169
supposed to exist, such as race-relations, pollution, valuing working and putting them on the balance women’s rights and consumer protection. Human sheet! What form could Human Resource Accounting then assume? Obviously, one could resource accounting has been discussed for some include demographic data about the work-force as years past in American journals, but without much a commentary on the normal accounting stateconcrete result. Now trans.atlantic interest seems ments; breakdowns of the work-force, by sex, age, to be turning from this topic to the barren field of grades, ranges of pay, levels of, education and socio-economic operating statements, probably training, statistics on industrial disputes, injuries, because the latter are extracted from “ordinary” absenteeism, engagements and discharges. accounting data, while human resource accounting Especially if these were presented in columnar demands a more radical restatement of the whole form over a number of years, one could see many concept of what “an account” really is. firms who were running into trouble whatever “Human Resource Accounting” is sometimes their balance sheets might at present say to the called “Human Asset Accounting”, and newspaper contrary. A firm which hired a large number of correspondents invariably ask, “Does that mean bright young men in the late 1950’s and early 60’s you want to put people on the balance sheet, like may have numbers of highly paid but underplant and buildings?” This is by no means possible: employed (and apprehensive!) mandarins in the if “people” did appear anywhere on the balance 1970’s. On the other hand, data of this sort only sheet, it would be as part of the goodwill of the invite the user of the accounts to write his own whole enterprise. Goodwill cannot be subdivided scenarios for what might happen; the company in any meaningful way between what arises from employs 14 Ph.D’s, which is good if it has a big the possession of a good work-force, and what basic research programme, but disastrous if they arises from the plant, the patents, the customers, are just disappointed university teachers earning the site and all the rest. One might be tempted to their bread as draughtsmen . . . feel that one could nevertheless capitalise the In any case, there is a logical flaw in attempting amounts spent on recruitment and training, but . to combine either a cash value or commentary reflection (or experiment!) shows conclusively that such amounts can only be arrived at after the material on the work-force with the normal most tendentious allocations of overheads. People accounts of the enterprise. In all countries and under all political systems, enterprises are run on do learn on the job, but one is on shakey ground if one seeks to capitalise any part of their wages, “self-financing” lines, which is to say that they are supervision costs or the like. It is like trying to required to stay solvent, and in particular not to assess how much food a young animal needs to distribute funds which might jeopardise that solvency in the future. Traditional accounts are grow, apart from what it needs to stay alive; thus about cash, and cash is something that can be improperly fed, the animal does not stop growing, if just grows more slowly, develops rickets and owned; it follows that the enterprise is an “entity” anaemia, a variety of skin diseases and so on. The which can logically be made the subject of an simile is quite exact, since both the worker and the account about its cash resources. This is why the animals are systems, which can only exist as a author made the slighting reference to “sociowhole. economic operating statements” in an earlier Thus if someone gets C40 for a week’s work, paragraph - a company does not own the society there is nothing else for the accountant to do with are in which it operates, so such statements without meaning if prepared from the point of this amount but credit the cash-book and debit view of the company and the activities under its work in progress, works overhead or whatever. control. Similarly, the company does not own its However, it must be recognised that the fact that the man was employed for that period has also workers, so not only can they leave with their skills, but the company’s shareholders are not an enhanced (or diminished) his skills, made him more or less loyal to the enterprise and more or entity to whom one could make an account for less eager to work. A complication is that it is not them even while they remain employed. solely what happens at work which affects these Especially if one adopts “the behavioural attitudes, but it is reasonable to suppose that a theory of the firm”_ it is possrble to see that substantial part of most changes in these areas will nevertheless the “firm” (in the broader sense of be generated by experience at work. the workers, managers and shareholders) is an It seems then that we have to reject all ideas of entity which could support some sort of accounts,
170
TREVOR
GAMBLING
although not one which is chargeable with a duty of solvency. Perhaps what is significant about such a firm of “collaborators” as they are called is not that they have collaborated in the past, but that they propose to continue to collaborate in the future. Its assets and liabilities are not at aU of a financial nature, but consist of the machinery of the collaboration itself, the organisation - or the system. This system will include the plant and machinery, and even the debtors and cash, but not in the same role which they play as assets in the financial accounts of the company; they are just resources, like the labour itself, which have to become available in the right quantities at the right time before any production at all becomes possib le. Now the obvious way of depicting a future state of a system is through a simulation model. One might operate the model in a number of ways; reference has been made to the possibility of a reader constructing scenarios for the future as an aid to using conventional accounting data. What the simulation will do is to provide one or more such scenarios in a complete and consistent form. One could see what return on capital would be needed to attract necessary finance, while holding all the other resources in a steady, satisfactory combination. Alternatively, one could see what would happen to wage-rates if productivity were held steady, or to the productivity if wages were held steady. Finally one could just see what would happen given some likely pattern of wages. interest rates and so on. It should be appreciated that we prepare one of these scenarios by implication every time we draw up a set of accounts, to the extent that any values placed upon non-monetary assets in excess of their realisable values must imply a belief that the system is going to function in some reasonable fashion in the future. The traditional accounts are really some sort of estimate of the present value of future C&I flows using this scenario. It follows that while an attempt to provide an overall “expected pattern” simulation must require all the flows of resources to be modelled at once (and so prove a most involved exercise), the “other things being equal” simulation can consider each flow individually. Accordingly it becomes possible to construct a model which shows how the flow of labour is supposed to be brought into operation, and what factors affect its productivity. At the outset it must be admitted that the separate treatment of flows in this way obscures one of the
most troublesome problems to arise in practice over this resource. The simulation seeks to show some “pure” measure of productivity in respect of labour alone; in practice usually some improvement in overall productivity is observed only after a change has been effected in the physical plant or methods of organisation. Subsequent wage negotiations are likely to revolve around the question of how much of the improvement in profit should go to the labour-force and how much to those collaborators who provided the other elements in the system. Possibly the model might give at least some clue as to the solution to this dilemma, but it would follow that the separate model might prove difficult to validate in isolation. Also the model might portray the reaction of an individual worker, or seek instead to deal with a whole group of workers. The former type might be useful where the reaction of an individual officer to a personal situation is of the essence; for example in the case of a police-officer or an air-line pilot. On the other hand, the more typical industrial situation will more often involve the group as a unit, since the situations facing them tend to be continuous streams of largely homogenous operations. A simulation for modelling the individual appears in Gambling (1974b); however, it is probably useful to say something about this here, because much of the work done by behaviourists in this area deals with the individual, and moreover the concepts are much easier to understand in those terms as well. Briefly, the model assumes that expenditure on education and training is one of the causes of acquisition (or loss!) of various skills by the worker; the actual level of skills possessed at any one time is compared with the levels required by the task given to the worker, and also with the role the worker himself sees as playing. If the levels are fairly well-matched, the worker is assumed to find pleasure in his work, and so give rise to some “rewards of the system” (which can be nil or even negative as any mismatching increases). These rewards of the system, plus the rewards of the individual (essentially his pay) are then compared with his needs; the surplus or deficit arrived at in this way determine his productivity. The system is i!lustrated in Fig. 1. It does not take much imagination to see that the rewards of the system are likely to affect the acquisition and loss of skills. that productivity will affect pay. that pay will affect role and that the role will affect needs! These feedback loops in the
SYSTEMS
DYNAMICS
AND HUMAN
RESOURCE
ACCOUNTING
171
Productlvtty
system
Fig.
system can be negative and suggest that it is one which can easily get out of control. People who have a negative reward from the system are going to demand large amounts of pay in order to remain reasonably productive. To the extent that their pay enhances their expectations, their needs will increase and their satisfaction with the job will decline. Thus, unless one can either increase the or ensure the payment of job-satisfaction increasingly large rates of pay, the job required of this individual is seen to be non-viable. This is why this type of analysis has suddenly become so important; continuous increases in real pay demands a growing economy - in a non-growth situation the choice is between job-enrichment and non-viability only. This connection between pay, rewards of the system and growth can be illustrated very well by the industry which the author knows best - the universities. For many years these institutions have been hiring very bright men while assuring them that they have no guarantee of promotion beyond the rank of lecturer. In fact, every recruit is certain that he will be given a senior lectureship and perhaps even a chair in the fullness of time! To the extent that the universities until quite recently have been growing very rapidly, in general they have not been disappointed. In a non-growth university system we cannot hope to attract suitable people to the lecturer grade as a career grade. This is a type of work in which the rewards of the system are usually high, so the need to provide specifically for senior lectureships for all competent officers might be met by adverse changes in such things as staff-student ratios,
1
location of disciplines and much else. On the other hand the guarantee of promotion would add weight to the pressure for short contracts (rather than established status) for younger academics and so reasonably lead to a demand for higher salaries by all ranks. At the same time, a no-growth economy will have a drastic effect on the amount of remunerated “outside work” which often forms a fair proportion of the overall remuneration of semor academics; thus there may be further demands forthcoming from the top of the scale. A great deal of unclear thinking (and the resulting anomalies) can be swept under the carpet so long as the economy expands . . . The model shown in Fig. 1 does not directly help in the preparation of the scenarios recommended to illustrate the probable impact of the human resources on the fortunes .of the collaborators who comprise the firm. This is because it deals with an individual, and the effect of the individuals as a group is not a simple summation of their individual effects; they will be changed by “group dynamics”, very much in the way that the technique of consolidation modifies “group accounts”. In any case, the model as described in Gambling (1974b) presents some loose ends; the job-specification and the basic pay are taken as externally arising constants. Obviously these items are themselves a product of the human resource system, although they are formed at a more aggregated level than that of the individual or the small group. It is possible to build another model at this higher level of aggregation, and this may be preferable to attempting a consolidation of the
172
TREVOR GAMBLING
individual models, since much of the material needed for such a model is already available. Manpower planning is in any case well suited to treatment as a dynamic simulation; a rather specialised example of this is to be found in the author’s discussion-paper entitled The Admissions
to a University Faculty as a System Dynamics Model. The model described in that paper concentrated upon such matters as the provision of accommodation and finance as limiting factors, while assuming that necessary staff-members and students would be forthcoming “as needed”! This is a common fault in such exercises, although today’s undergraduates provide the pool for tomorrow’s post-graduates, who provide the staff for the day after that. What is needed is an amalgamation of the two models, which will describe (for the general industrial enterprise) not only the flows of personnel, finance and accommodation, but also the supply, wage-rates, skills and productivity as well. Moreover, the manpower needs of the enterprise are for quantities of service of various kinds, rather than it is their productivity which for “bodies”; converts “service” into “bodies”, and so creates the demand for the different classes of labour. So much for the theory! We must now turn to the problem of whether information about the behaviour of variables like “tasks” and “rewards of the system” are likely to’be ‘forfhcoming in real life. It is certainly true that some sorts of models of this phenomenon could be built without any reference at all to behavioural variables. This is done simply by treating the human resource as a “black box” about whose inner workings nothing is known. This is the standard approach of econometrics and involves identifying various factors which are thought to be the independent variables of the model and then using some techniques of multivariate analysis to infer their mathematical relationship with the dependent variables from series of historical data. Thus one might perhaps relate labour-turnover to age, race, sex and level of education. Now it is rather difficult to measure or even observe the workings of a human society or personality; some quite respected figures in the social sciences might go so far as to declare it to be strictly impossible if the terms are to be interpreted literally, while the rest of us may feel a certain uneasiness that anyone should try. There seems to be no halfway house between the “black box” and the “skinner box”! Perhaps the most significant finding of my
research project will turn out to be the fact that there are firms in Great Britain which are genuinely interested in building models which attempt to open up the black box. Their reasons give me some confidence to state what human resource accounting really is, even if its methodology seems to require a little more work from my team and myself. The response can be summarised like this: (a) I have been in touch with 20-odd enterprises of various sorts of whom 5 seem fairly certain to participate in the model-building/ validation activity at this time. One is a comparatively small subsidiary of a larger group; the remainder could reasonably be described as “household names”. The smaller firm is particularly interesting from a scientific point of view because it seems to require a sort of halfway house between the “individual” and the “group” versions of my models. Perhaps I might add that the comparative success in locating suitable “specimens” in no way lessens my desire for others, since generalisation is still veiy difficult from this comparatively small sample! (b) However, what I have seen so far does suggest a general pattern for such models. This comprises (1) a dynamic inventory forecast of levels of skill and numbers of personnel; (2) a manpower planning model which shows the eftect of various possible personnel policies on recruitment, labour turnover, morale, rewards and so on; plus (3) a financial model which simply calculates the wages expenditure, recruitment and training costs etc. for the different policies. (c) Some might claim that this was just “manpower planning with knobs on”! This would be a fair criticism, were it not that all 5 firms had also come to the conclusion that their problems required the installation (or extension) of some fairly elaborate system of continuous recordkeeping about many aspects of their personnel function. It is this “accounting” element which has been missing from so much work in this area. (d) Finally, it is also interesting to comment on the sort of problems which the various respondents have seen as areas where Human Resource Accounting might prove useful. Obviously, these tend to be very sensitive areas indeed, so one must be rather guarded over the details disclosed. (i), (ii) Two firms are in areas with high and very mixed immigrant populations; quite apart aspect, high labour from the “race relations” turnover has been something of a problem,
SYSTEMS DYNAMICS AND HUMAN RESOURCE ACCOUNTING
especially to one of the companies. These firms are interested, in other words, in whether the “manpower planning” section of the model can disclose a personnel policy which will secure a stable work force with a proper racial distribution over all ranks and over a period of time. (iii) Another firm has three distinct sources of labour: ordinary school leavers, those with “management potential” and temporary labour. Is it possible to devise a policy which will supply the firm‘s needs for all these classes over a period of time and also supply a satisfactory career-pattern for each of them? (iv) Another firm is in an industry which by tradition has employed exclusively casual labour. Not only are there now union and social pressures for decasualisation, but this come-and-go approach to employment extends through highly skilled workers to quite senior members of the technical management at a very high cost. Of course the reason for the casual labour in the past has been the nature of the market for the product, and this is not changing. Is it possible to discover patterns of recruitment and training which may be compatible with likely demands? Would the resulting model suggest a pattern of contracts which might form a satisfactory demand? (v) At a more “individual” level, another respondent is about to make a most profound change in the working methods of a section of its organ&lion. Is it possible to find a pattern of (1) recruiting, and (2) training the workers, which can be combined with (3) the rate of implementation of the new scheme so as to cause minimum disruption? All these questions are certainly about “manpower planning with knobs on”, but the financial implications of their resolution or non-resolution are obvious as well: The first four enterprises depend for their long-term viability on the provision of satisfactory policies in these areas; the fifth one can do itself actual harm by its ‘?mprovements” unless the right patterns are found. However, there is another element running through the first four cases which is probably more significant than any financial effects which the problems themselves may entail. All of them are being required to justify their personnel
173
policies to an outside body - the Race Relations Board, the Department of Employment and perhaps the Trade Union Congress! That is to say that a fundamental aspect of Human Resource Accounting (as revealed by the prQCtiCQ/ demand for it) is a form of “stewardship accounting” or rather than financial accounting “accountability”, or management accounting of the more general type. It seems that decision-makers who do not arrive at their decisions in an open court or legislature are likely to be asked to provide evidence of the grounds on which they have acted. This is a real-life social audit, and the really interesting point is that the people affected by it are seeking a model which is both dynamic and attempts to open up the box of the human organisation. The reason is the subtlety of the Race Relations legislation, which seeks to go beyond requiring a simple numerical balance within a firm, but also looks at the opportunities given to minority groups to advance their careers. An econometric type of model would merely confirm an undesirable state of affairs - namely that minority groups have high turnover-rates, toil to complete further education and in fact do not get promoted either! The legislation requires firms to take positive steps to overcome this, so what the personnel people have to demonstrate is the sincerity of their belief that some new policy would bring about a fair distribution of promotion in the future. This requires an exercise of skill and judgement in the field of social psychology, but nevertheless seems to me to be a true accounting function. One might note that British corporation legislation does not define “divisible profits”, so that rather similar demonstrations of well-founded decision-taking have been demanded for many years in cases where companies go into liquidation after a fairly recent payment of dividend. The justification for equating “accountability” with “accounting” in both examples is the need to maintain records about the variables which are the subject of the decision. It is clear that records needed to explain personnel transactions are now effectively required of British companies, even if very few have much idea of how to set about providing them.
174
TREVOR GAMBLING B IB LIOG RAPHY American Accounting Association, Report of the Committee on the Measurement of Social Costs. Supplement of Volume XLLX, The AccounringReuiew (1974), pp. 99-l 13. American Accounting Association, Report of the Committee on the Relationship of Behavioral ;;;;z9and Accounting. Supplement of Volume XLIX. The Accounting Review t1974k pp. Gambling, T:. Socieral Accounting (London: Allen & Unwin, 1974a). Gambling, T., A System Dynamics Approach to Human Resource Accounting, Review (1974b), pp. 538-546.
i7re Accounting
Organizations and Socierv,
Vol. 1. No. 2-3, pp. 167-174. Pergamon Press, 1976. Printed in Great Britain
SYSTEMSDYNAMICSANDHUMANRESOURCEACCOUNTING" TREVOR GAMBLING U~liversity of Birmingham
Abstract Accountants all over the world are being told that their particular view of the world is too narrow. Within this context. the article reviews the potentialities and problems of Human Resource Accounting, and in passing, critically discusses some previous comments on more general behavioural research in the accounting area. Particular consideration is given to the role which dynamic systems models may serve and the paper reviews some of the author’s initial observations and experiences in the area.
Human resource accounting is by no means a single topic for research. It contains large areas which are not really interpretable in terms of “behavioural science”, while those which can be interpreted in that way can be seen to be very interesting, of vital importance to good management. but whose analysis seems to involve one in most tendentious questions of philosophy, politics and in the end of morals. Indeed, it seems possible to argue that what distinguishes the accountant from other scientists is this very desire to encompass the whole physical and social world in a single all-embracing system of analysis. This is the same sort of claim as Newtonian physics makes about the physical world alone: as is the case with classical physics, a number of points of difficulty suggest that the theories are not quite true - but that doesn’t prevent the general adequacy of the explanations from assisting greatly in the solution of many important practical problems. However, there can be no doubt that at this time accountants all over the world are being told that their particular view of the world is too narrow, and fails to show the influence or even the existence of many factors which are of importance. In particular, critics seem to feel that their analysis is purely economic in its interest and neglects almost all social and behavioural issues. One must ask why it is only recently that businessmen and administrators have come to the conclusion that there was a case for any sort of extra economic accounting. Some might suppose
that it was because our ancestors were a hard-headed and hard-hearted lot whose modus operandi was to grab the cash and let the rest go hang! Even if this were true, it would still require a certain belief about how things worked - a model, in fact. Essentially this would be that markets so that all the effects of any were “perfect”, activity were fairly reflected in the price system. That is to say that there was no discrepancy between the social net product and the private net product and *‘externalities” did not exist (or if they did. they were kept within reasonable limits by law or custom). When Pigou first raised the latter debate it was thought that it was extremely difficult to demonstrate either its truth or error, but now most people need littie convincing of the proposition that the price-mechanism is a faulty instrument at least in an affluent, post-industrial society. Traditional accounting is very clearly based on this perfect market assumption; indeed, one can see that if the price mechanism really could take care of all side effects, a simple listing of priced. first-order transactions would be all that could be said about the activity of an enterprise. Consider how the American Accounting Association Committee on the Measurement of Social Costs (1974, p. 99) neatly limits its remit: “We were concerned fundamentally with first order effects only . . We were not concerned with social costs in the traditional economic sense of Pareto optimality.”
*An earlier version of this paper was presented at the Seminar on Human Resource Accounting held at the European Institute for Advanced Studies in Management, Brussels. The research project discussed is financed by the British Social Science Research Council. 167
168
TREVOR GAMBLING
This leads this committee to confine its discussion to thi: possible need to report on the presence (or absence) of specific programmes initiated by the company in areas like training, community service, environmental and consumer protection; the idea that what the company does in its main production programme is infinitely more influential in alJ these areas (and on “society” in general) can simply be ignored - as second order effects. If it is accepted that the price-mechanism is faulty, so that externalities do exist, the model one is compelled to use to order one’s affairs at any level of aggregation becomes a fairly complex, multi-level, multimedia dynamic simulation. My own research activity in human resource accounting has been in the construction of some models of this type - and my current task is their “external validation”, by which I mean that some models should be so constructed and quantified that it is possible to identify dependent and independent variables and obtain a good “fit” between the predicted and observed dependent variables over a period of time. This apparently straightforward approach would seem to be anathema to another AAA Committee, this time the Committee on the Relationship of Behavioral Science and Accounting (1974, p. 13 l), who voice considerable dislike for such appeals to “external validity” “External validity asks the question of generalizability: to what populations, settings, treatments variables and measurement variables, can this experimental effect be generalized? The emphasis so far (in accounting, not necessarily in behavioral science) has been on external validity and this imbalance has caused some unfortunate side effects.”
The contrast is with “internal validity”, which the Committee seems to equate largely with “rigor” and which they believe resides in laboratory experiments designed to test rather smah segments of a theory as opposed to broader based field studies. It is my view that even from the point of view of high theory, this approach is mistaken; it is the relative significance of laboratory experiments which may distinguish the social sciences from the natural sciences! We can learn a lot from how a chemical reacts under conditions of weightlessness, in a vacuum and so on; how a man reacts in society only has meaning in the context of that which itself provides the taxonomy, society, model, the general Weltanschauung that alone provides any basis for making statements about the
phenomenon at ail. This difficulty is certainly not unknown to the Committee, who say (p. 135) of behavioural accounting researchers: “Unfortunately, too much of behavioral accounting research has consisted of hunting and tracking something without knowing what it was. Perhaps the greatest deficiency in behavioral accounting research is the lack of formul mo&ls. By formal models, here, we simply mean systematic attempts to formulate sets of principles, postulates and hypotheses about relationships among variables which can then be tested empirically.”
Now this demand for a model, and a proper taxonomy for categorizing phenomena is central, or should be central, to what accounting is all about. However, both Ricco Mattessich and Orace Johnson have claimed that accountants are far too little concerned with such matters. I have said elsewhere (Gambling, 1974a) that the present fragmentation of “the social sciences” is a splendid device for categorising (and perhaps therefore devaluing?) other people S problems. This makes it possible for economists to have their model and an attendant taxonomy, social psychologists another, political scientists a third, and so on. Quite often, wili be describing the same these people phenomenon, but in quite different ways. This may be fair enough in an abstract sort of way, but the problems become very great when one tries to bridge the gaps between two or more disciplines, or in more concrete terms, if one wants a model of the workings of a society or social subgroup 11sa whole. Because real-life problems are strictly meaningless apart from their context in society, the businessman, the statesman and the administrator are rarefy in a position to carry out controlled experiments, and the accountant is right in there with them, providing control data data about a dynamic and decision-making situation which unobligingly wanders over the whole gamut of social science, economic, political and behavioural. This suggests that the data for external validation must be obtained from some overah picture of the situation of the entity as a whole - in effect an accounting system. The general feeling that accounting is failing to include noneconomic factors has tended to crystalise into demands that accounts should reflect greater concern for human factors of production, on the one hand, or alternatively that it should set out what the enterprise is doing (or not doing) for “society” - usually in those areas where externalities to the price system are
SYSTEMSDYNAMICSANDHUMAIIRESOURCEACCOUNTING
169
supposed to exist, such as race-relations, pollution, valuing working and putting them on the balance women’s rights and consumer protection. Human sheet! What form could Human Resource Accounting then assume? Obviously, one could resource accounting has been discussed for some include demographic data about the work-force as years past in American journals, but without much a commentary on the normal accounting stateconcrete result. Now trans.atlantic interest seems ments; breakdowns of the work-force, by sex, age, to be turning from this topic to the barren field of grades, ranges of pay, levels of, education and socio-economic operating statements, probably training, statistics on industrial disputes, injuries, because the latter are extracted from “ordinary” absenteeism, engagements and discharges. accounting data, while human resource accounting Especially if these were presented in columnar demands a more radical restatement of the whole form over a number of years, one could see many concept of what “an account” really is. firms who were running into trouble whatever “Human Resource Accounting” is sometimes their balance sheets might at present say to the called “Human Asset Accounting”, and newspaper contrary. A firm which hired a large number of correspondents invariably ask, “Does that mean bright young men in the late 1950’s and early 60’s you want to put people on the balance sheet, like may have numbers of highly paid but underplant and buildings?” This is by no means possible: employed (and apprehensive!) mandarins in the if “people” did appear anywhere on the balance 1970’s. On the other hand, data of this sort only sheet, it would be as part of the goodwill of the invite the user of the accounts to write his own whole enterprise. Goodwill cannot be subdivided scenarios for what might happen; the company in any meaningful way between what arises from employs 14 Ph.D’s, which is good if it has a big the possession of a good work-force, and what basic research programme, but disastrous if they arises from the plant, the patents, the customers, are just disappointed university teachers earning the site and all the rest. One might be tempted to their bread as draughtsmen . . . feel that one could nevertheless capitalise the In any case, there is a logical flaw in attempting amounts spent on recruitment and training, but . to combine either a cash value or commentary reflection (or experiment!) shows conclusively that such amounts can only be arrived at after the material on the work-force with the normal most tendentious allocations of overheads. People accounts of the enterprise. In all countries and under all political systems, enterprises are run on do learn on the job, but one is on shakey ground if one seeks to capitalise any part of their wages, “self-financing” lines, which is to say that they are supervision costs or the like. It is like trying to required to stay solvent, and in particular not to assess how much food a young animal needs to distribute funds which might jeopardise that solvency in the future. Traditional accounts are grow, apart from what it needs to stay alive; thus about cash, and cash is something that can be improperly fed, the animal does not stop growing, if just grows more slowly, develops rickets and owned; it follows that the enterprise is an “entity” anaemia, a variety of skin diseases and so on. The which can logically be made the subject of an simile is quite exact, since both the worker and the account about its cash resources. This is why the animals are systems, which can only exist as a author made the slighting reference to “sociowhole. economic operating statements” in an earlier Thus if someone gets C40 for a week’s work, paragraph - a company does not own the society there is nothing else for the accountant to do with are in which it operates, so such statements without meaning if prepared from the point of this amount but credit the cash-book and debit view of the company and the activities under its work in progress, works overhead or whatever. control. Similarly, the company does not own its However, it must be recognised that the fact that the man was employed for that period has also workers, so not only can they leave with their skills, but the company’s shareholders are not an enhanced (or diminished) his skills, made him more or less loyal to the enterprise and more or entity to whom one could make an account for less eager to work. A complication is that it is not them even while they remain employed. solely what happens at work which affects these Especially if one adopts “the behavioural attitudes, but it is reasonable to suppose that a theory of the firm”_ it is possrble to see that substantial part of most changes in these areas will nevertheless the “firm” (in the broader sense of be generated by experience at work. the workers, managers and shareholders) is an It seems then that we have to reject all ideas of entity which could support some sort of accounts,
170
TREVOR
GAMBLING
although not one which is chargeable with a duty of solvency. Perhaps what is significant about such a firm of “collaborators” as they are called is not that they have collaborated in the past, but that they propose to continue to collaborate in the future. Its assets and liabilities are not at aU of a financial nature, but consist of the machinery of the collaboration itself, the organisation - or the system. This system will include the plant and machinery, and even the debtors and cash, but not in the same role which they play as assets in the financial accounts of the company; they are just resources, like the labour itself, which have to become available in the right quantities at the right time before any production at all becomes possib le. Now the obvious way of depicting a future state of a system is through a simulation model. One might operate the model in a number of ways; reference has been made to the possibility of a reader constructing scenarios for the future as an aid to using conventional accounting data. What the simulation will do is to provide one or more such scenarios in a complete and consistent form. One could see what return on capital would be needed to attract necessary finance, while holding all the other resources in a steady, satisfactory combination. Alternatively, one could see what would happen to wage-rates if productivity were held steady, or to the productivity if wages were held steady. Finally one could just see what would happen given some likely pattern of wages. interest rates and so on. It should be appreciated that we prepare one of these scenarios by implication every time we draw up a set of accounts, to the extent that any values placed upon non-monetary assets in excess of their realisable values must imply a belief that the system is going to function in some reasonable fashion in the future. The traditional accounts are really some sort of estimate of the present value of future C&I flows using this scenario. It follows that while an attempt to provide an overall “expected pattern” simulation must require all the flows of resources to be modelled at once (and so prove a most involved exercise), the “other things being equal” simulation can consider each flow individually. Accordingly it becomes possible to construct a model which shows how the flow of labour is supposed to be brought into operation, and what factors affect its productivity. At the outset it must be admitted that the separate treatment of flows in this way obscures one of the
most troublesome problems to arise in practice over this resource. The simulation seeks to show some “pure” measure of productivity in respect of labour alone; in practice usually some improvement in overall productivity is observed only after a change has been effected in the physical plant or methods of organisation. Subsequent wage negotiations are likely to revolve around the question of how much of the improvement in profit should go to the labour-force and how much to those collaborators who provided the other elements in the system. Possibly the model might give at least some clue as to the solution to this dilemma, but it would follow that the separate model might prove difficult to validate in isolation. Also the model might portray the reaction of an individual worker, or seek instead to deal with a whole group of workers. The former type might be useful where the reaction of an individual officer to a personal situation is of the essence; for example in the case of a police-officer or an air-line pilot. On the other hand, the more typical industrial situation will more often involve the group as a unit, since the situations facing them tend to be continuous streams of largely homogenous operations. A simulation for modelling the individual appears in Gambling (1974b); however, it is probably useful to say something about this here, because much of the work done by behaviourists in this area deals with the individual, and moreover the concepts are much easier to understand in those terms as well. Briefly, the model assumes that expenditure on education and training is one of the causes of acquisition (or loss!) of various skills by the worker; the actual level of skills possessed at any one time is compared with the levels required by the task given to the worker, and also with the role the worker himself sees as playing. If the levels are fairly well-matched, the worker is assumed to find pleasure in his work, and so give rise to some “rewards of the system” (which can be nil or even negative as any mismatching increases). These rewards of the system, plus the rewards of the individual (essentially his pay) are then compared with his needs; the surplus or deficit arrived at in this way determine his productivity. The system is i!lustrated in Fig. 1. It does not take much imagination to see that the rewards of the system are likely to affect the acquisition and loss of skills. that productivity will affect pay. that pay will affect role and that the role will affect needs! These feedback loops in the
SYSTEMS
DYNAMICS
AND HUMAN
RESOURCE
ACCOUNTING
171
Productlvtty
system
Fig.
system can be negative and suggest that it is one which can easily get out of control. People who have a negative reward from the system are going to demand large amounts of pay in order to remain reasonably productive. To the extent that their pay enhances their expectations, their needs will increase and their satisfaction with the job will decline. Thus, unless one can either increase the or ensure the payment of job-satisfaction increasingly large rates of pay, the job required of this individual is seen to be non-viable. This is why this type of analysis has suddenly become so important; continuous increases in real pay demands a growing economy - in a non-growth situation the choice is between job-enrichment and non-viability only. This connection between pay, rewards of the system and growth can be illustrated very well by the industry which the author knows best - the universities. For many years these institutions have been hiring very bright men while assuring them that they have no guarantee of promotion beyond the rank of lecturer. In fact, every recruit is certain that he will be given a senior lectureship and perhaps even a chair in the fullness of time! To the extent that the universities until quite recently have been growing very rapidly, in general they have not been disappointed. In a non-growth university system we cannot hope to attract suitable people to the lecturer grade as a career grade. This is a type of work in which the rewards of the system are usually high, so the need to provide specifically for senior lectureships for all competent officers might be met by adverse changes in such things as staff-student ratios,
1
location of disciplines and much else. On the other hand the guarantee of promotion would add weight to the pressure for short contracts (rather than established status) for younger academics and so reasonably lead to a demand for higher salaries by all ranks. At the same time, a no-growth economy will have a drastic effect on the amount of remunerated “outside work” which often forms a fair proportion of the overall remuneration of semor academics; thus there may be further demands forthcoming from the top of the scale. A great deal of unclear thinking (and the resulting anomalies) can be swept under the carpet so long as the economy expands . . . The model shown in Fig. 1 does not directly help in the preparation of the scenarios recommended to illustrate the probable impact of the human resources on the fortunes .of the collaborators who comprise the firm. This is because it deals with an individual, and the effect of the individuals as a group is not a simple summation of their individual effects; they will be changed by “group dynamics”, very much in the way that the technique of consolidation modifies “group accounts”. In any case, the model as described in Gambling (1974b) presents some loose ends; the job-specification and the basic pay are taken as externally arising constants. Obviously these items are themselves a product of the human resource system, although they are formed at a more aggregated level than that of the individual or the small group. It is possible to build another model at this higher level of aggregation, and this may be preferable to attempting a consolidation of the
172
TREVOR GAMBLING
individual models, since much of the material needed for such a model is already available. Manpower planning is in any case well suited to treatment as a dynamic simulation; a rather specialised example of this is to be found in the author’s discussion-paper entitled The Admissions
to a University Faculty as a System Dynamics Model. The model described in that paper concentrated upon such matters as the provision of accommodation and finance as limiting factors, while assuming that necessary staff-members and students would be forthcoming “as needed”! This is a common fault in such exercises, although today’s undergraduates provide the pool for tomorrow’s post-graduates, who provide the staff for the day after that. What is needed is an amalgamation of the two models, which will describe (for the general industrial enterprise) not only the flows of personnel, finance and accommodation, but also the supply, wage-rates, skills and productivity as well. Moreover, the manpower needs of the enterprise are for quantities of service of various kinds, rather than it is their productivity which for “bodies”; converts “service” into “bodies”, and so creates the demand for the different classes of labour. So much for the theory! We must now turn to the problem of whether information about the behaviour of variables like “tasks” and “rewards of the system” are likely to’be ‘forfhcoming in real life. It is certainly true that some sorts of models of this phenomenon could be built without any reference at all to behavioural variables. This is done simply by treating the human resource as a “black box” about whose inner workings nothing is known. This is the standard approach of econometrics and involves identifying various factors which are thought to be the independent variables of the model and then using some techniques of multivariate analysis to infer their mathematical relationship with the dependent variables from series of historical data. Thus one might perhaps relate labour-turnover to age, race, sex and level of education. Now it is rather difficult to measure or even observe the workings of a human society or personality; some quite respected figures in the social sciences might go so far as to declare it to be strictly impossible if the terms are to be interpreted literally, while the rest of us may feel a certain uneasiness that anyone should try. There seems to be no halfway house between the “black box” and the “skinner box”! Perhaps the most significant finding of my
research project will turn out to be the fact that there are firms in Great Britain which are genuinely interested in building models which attempt to open up the black box. Their reasons give me some confidence to state what human resource accounting really is, even if its methodology seems to require a little more work from my team and myself. The response can be summarised like this: (a) I have been in touch with 20-odd enterprises of various sorts of whom 5 seem fairly certain to participate in the model-building/ validation activity at this time. One is a comparatively small subsidiary of a larger group; the remainder could reasonably be described as “household names”. The smaller firm is particularly interesting from a scientific point of view because it seems to require a sort of halfway house between the “individual” and the “group” versions of my models. Perhaps I might add that the comparative success in locating suitable “specimens” in no way lessens my desire for others, since generalisation is still veiy difficult from this comparatively small sample! (b) However, what I have seen so far does suggest a general pattern for such models. This comprises (1) a dynamic inventory forecast of levels of skill and numbers of personnel; (2) a manpower planning model which shows the eftect of various possible personnel policies on recruitment, labour turnover, morale, rewards and so on; plus (3) a financial model which simply calculates the wages expenditure, recruitment and training costs etc. for the different policies. (c) Some might claim that this was just “manpower planning with knobs on”! This would be a fair criticism, were it not that all 5 firms had also come to the conclusion that their problems required the installation (or extension) of some fairly elaborate system of continuous recordkeeping about many aspects of their personnel function. It is this “accounting” element which has been missing from so much work in this area. (d) Finally, it is also interesting to comment on the sort of problems which the various respondents have seen as areas where Human Resource Accounting might prove useful. Obviously, these tend to be very sensitive areas indeed, so one must be rather guarded over the details disclosed. (i), (ii) Two firms are in areas with high and very mixed immigrant populations; quite apart aspect, high labour from the “race relations” turnover has been something of a problem,
SYSTEMS DYNAMICS AND HUMAN RESOURCE ACCOUNTING
especially to one of the companies. These firms are interested, in other words, in whether the “manpower planning” section of the model can disclose a personnel policy which will secure a stable work force with a proper racial distribution over all ranks and over a period of time. (iii) Another firm has three distinct sources of labour: ordinary school leavers, those with “management potential” and temporary labour. Is it possible to devise a policy which will supply the firm‘s needs for all these classes over a period of time and also supply a satisfactory career-pattern for each of them? (iv) Another firm is in an industry which by tradition has employed exclusively casual labour. Not only are there now union and social pressures for decasualisation, but this come-and-go approach to employment extends through highly skilled workers to quite senior members of the technical management at a very high cost. Of course the reason for the casual labour in the past has been the nature of the market for the product, and this is not changing. Is it possible to discover patterns of recruitment and training which may be compatible with likely demands? Would the resulting model suggest a pattern of contracts which might form a satisfactory demand? (v) At a more “individual” level, another respondent is about to make a most profound change in the working methods of a section of its organ&lion. Is it possible to find a pattern of (1) recruiting, and (2) training the workers, which can be combined with (3) the rate of implementation of the new scheme so as to cause minimum disruption? All these questions are certainly about “manpower planning with knobs on”, but the financial implications of their resolution or non-resolution are obvious as well: The first four enterprises depend for their long-term viability on the provision of satisfactory policies in these areas; the fifth one can do itself actual harm by its ‘?mprovements” unless the right patterns are found. However, there is another element running through the first four cases which is probably more significant than any financial effects which the problems themselves may entail. All of them are being required to justify their personnel
173
policies to an outside body - the Race Relations Board, the Department of Employment and perhaps the Trade Union Congress! That is to say that a fundamental aspect of Human Resource Accounting (as revealed by the prQCtiCQ/ demand for it) is a form of “stewardship accounting” or rather than financial accounting “accountability”, or management accounting of the more general type. It seems that decision-makers who do not arrive at their decisions in an open court or legislature are likely to be asked to provide evidence of the grounds on which they have acted. This is a real-life social audit, and the really interesting point is that the people affected by it are seeking a model which is both dynamic and attempts to open up the box of the human organisation. The reason is the subtlety of the Race Relations legislation, which seeks to go beyond requiring a simple numerical balance within a firm, but also looks at the opportunities given to minority groups to advance their careers. An econometric type of model would merely confirm an undesirable state of affairs - namely that minority groups have high turnover-rates, toil to complete further education and in fact do not get promoted either! The legislation requires firms to take positive steps to overcome this, so what the personnel people have to demonstrate is the sincerity of their belief that some new policy would bring about a fair distribution of promotion in the future. This requires an exercise of skill and judgement in the field of social psychology, but nevertheless seems to me to be a true accounting function. One might note that British corporation legislation does not define “divisible profits”, so that rather similar demonstrations of well-founded decision-taking have been demanded for many years in cases where companies go into liquidation after a fairly recent payment of dividend. The justification for equating “accountability” with “accounting” in both examples is the need to maintain records about the variables which are the subject of the decision. It is clear that records needed to explain personnel transactions are now effectively required of British companies, even if very few have much idea of how to set about providing them.
174
TREVOR GAMBLING B IB LIOG RAPHY American Accounting Association, Report of the Committee on the Measurement of Social Costs. Supplement of Volume XLLX, The AccounringReuiew (1974), pp. 99-l 13. American Accounting Association, Report of the Committee on the Relationship of Behavioral ;;;;z9and Accounting. Supplement of Volume XLIX. The Accounting Review t1974k pp. Gambling, T:. Socieral Accounting (London: Allen & Unwin, 1974a). Gambling, T., A System Dynamics Approach to Human Resource Accounting, Review (1974b), pp. 538-546.
i7re Accounting