The value of social capital for organizations
What is the social capital?
Social Capital (SC) is a concept that comes from economics. It can be defined as a combination of the number of relationships someone has, the economic usefulness of those relationships, and the quality of those relationships: effectively, how well known someone is, in what circles, and with what degree of affection. It’s social capital in an organization which means that we care about the effect our work will have on the next part of the production chain, instead of throwing substandard work down the functional line saying, ‘I’ve done my part. , their problem now’.
Why is it important in organizations?
It is the SC of an organization that influences the return obtained on the value of financial and intellectual assets. It is what makes the whole greater than the sum of the parts. It is social capital that unlocks good organizational citizenship behavior, high-level motivation, and that ‘feel good’ about the job. Social capital is the antidote to the pervasive silo mentality that pervades most larger organizations, the tribal mentality that can work against the full realization of the potential value of the organization’s assets.
An organization can purposefully invest in this valuable source of capital like any other. And as with any other investment, it is possible to identify the investment areas that are likely to generate the highest return and therefore carefully target investment activity. For example, an organization’s social capital is unlikely to increase if it invests in helping dining room staff get to know the board, in the same way that it would invest in building social capital within the board (which is not to say that the first option has no value, and in some situations may have the highest value).
Why don’t organizations invest more in social capital?
Leaders can often intuitively see the value of SC, however the inability to quantify this capital and the return on their investment prevents them from taking the risk of investing in it. Interestingly, intellectual capital, a similar form of non-physical capital, shows financial returns that can be directly attributed to it on the balance sheet, for example license and royalty income. These returns can be used by leaders to justify the initial investment they made in developing intellectual capital. Currently there is no such mechanism to capture and measure the return on investment in equity capital.
Measurement of the economic value of social capital
It is tempting to conclude from this that SC can never exist in the financial sense in the way that machines, buildings, and patents do; that it is not worth leaders going the extra mile to try to identify its effect on the bottom line. Recent developments in economics suggest that such thinking may be challenged. Equity capital doesn’t just exist as a factor in the economy, it exists to such a real and definable extent that banks now use it as collateral for loans, particularly microcredit.
The history of microfinance
Billions of dollars have been slowed down to (and repaid by) tens of millions of people in areas of the world where equity capital is the only form of capital available, and not just in the third world: if you’re reading this on London, Manchester, Birmingham or Glasgow to name just a few places, this is probably happening within a few miles of you.
Social capital is the basis of microfinance, the practice of lending very small amounts of money to the poorest. It has already revolutionized development policy around the world. The problem, identified by Muhammad Yunus in Bangladesh in the 1970s, was that the poor could not borrow money from commercial sources not because I could not return it but they had no incentives to do so. This was because they had no collateral that could be recovered if they defaulted. As a consequence, no private lender was willing to lend them money. Yunus’s experience with Grameen Bank, and that of other microfinance institutions, is that the poor, properly incentivized, have the highest repayment rates in the world for small loans, nearly 97%.
Yunus incentivized people by making possible future loans to others in the village conditional on repayment of the loan by each borrower. In other words, he secured the loan against the capital stock of each villager. If she defaulted, none of her friends or neighbors would get loans and she (the vast majority of microfinance clients are women) would be a persona non grata in town. This suggests that, for a particular individual, her social capital stock must be worth more than the value of the loan or she would not repay it. A Bangladeshi villager making the decision to repay a $20 loan is making a sophisticated calculation about the value of an intangible asset: her equity capital. This clear indicator of choice behavior suggests that a financial value can be assigned to an individual’s social capital.
Can social capital be measured in organizations?
The microfinance experience suggests that CS can be measured. The question is how can organizational leaders find a way to make such calculations for the stock of social capital in their organizations?
There is no clear answer on this yet. We can begin to recognize CS in organizations by reflecting it in our ways of talking about our organization. For example, referring to the staff member who takes the time to check in with colleagues to check on her needs and expectations, or who takes the time to let others know that something has changed so they don’t waste their time, such as invaluable, it does not help us recognize the value it adds. On the other hand, saying that she and her actions are valuable, begins to lead us to ask the right questions about ‘How valuable?’ and ‘How can we measure that?’ and ‘How much value does that behavior add?’
How can we build social capital in organizations?
We may not yet know how to measure SC in organizations with financial accuracy, but we do know how to invest in it and build it.
The organizational development activities developed in recent years, based on the understanding of the organization as a living human system, act to increase social capital.