The father of Nobel Prize winner Arno Penzias had trouble grasping certain differences between horses and cars.
"It took many years for him to break himself of the habit of going out in a snowstorm and putting a blanket over the engine block," recalls Penzias, who is vice president of research at AT&T Bell Laboratories.Penzias told the story recently to make his argument that people, even smart people, get stuck in old ways of thinking. His favorite current example is accounting.
Accountants are trapped in an Industrial Age mentality, Penzias argues. They know how to tote up the value of bricks, mortar and pension funds but they have no room in their balance sheets for the value of people.
Ignoring people as an asset may have worked once, but it is a mistake in the Information Age, says Penzias, who spells out this and other ideas in a provocative new book, "Ideas and Information: Managing in a High-Tech World."
Under current accounting standards, a company that scrimps on training will actually look better in its year-end financial statement because its expenses will be lower and its profits consequently higher.
"You can screw up the most important asset of the country and never show it," Penzias said. In fact, he says, that is exactly what a lot of American companies have done.
Accountants have heard this criticism before, mainly from growth-minded executives who complain that "bean counters" are discouraging them from buying new equipment and hiring more people.
When McDonald's Corp. trains employees at Hamburger U. it is obviously building human assets, but the school shows up on its books as merely another cost of doing business, equivalent to buying potatoes for french fries.
In answer to people like Penzias, accountants acknowledge that people are an asset. But they say, in their conservative way, that their value is impossible to measure consistently and verifiably.
For example, asks accounting specialist Paul Rosenfield, how much is Lee Iacocca worth to Chrysler Corp.? Hard to say.
Good people don't appear as assets but they should show up indirectly in higher profits, said Rosenfield, who is director of the accounting standards division of the American Institute of Certified Public Accountants.
Donald Aronson of Arthur Young & Co. has an even more telling criticism of Penzias' people-are-assets argument. Because nearly everything a company spends money on can somehow be justified as an investment in the future - including advertising, salaries and bonuses - then nearly any expense can be considered a capital investment.
That strategy would make profits look better in the short term. But higher reported profits usually mean higher taxes. And in the long run, the cost of depreciating all the things suddenly considered assets would be astronomical.
Counting current expenses as capital investment is a slippery slope on which most accountants would rather not tread, said Aronson, Arthur Young's national director of marketing.
Still, accountants are listening to the criticism and searching for ways to measure the hidden value in companies. That includes the value of investment to improve product quality - something else that is missed by current accounting standards.
Investment, whether in people or machines, always has required a certain amount of optimism that the spending will pay off by generating greater sales and profits. There is a real leap of faith when the investment does not show up anywhere on a company's books.
"What we're trying to do is reduce the leap of faith," said Patrick Romano, director of research at the National Association of Accountants.
Penzias admits he knows more about astronomy than accounting, but then, that's the point. Accounting, he says, is too important to be left to the accountants.
"The most important and intellectually demanding profession in this country ought to be accountancy, because it's about quantification of value," he said.