The Economic Value Of Social Capital To Organizations

The Economic Value Of Social Capital To Organizations

What Is Social Capital?

Positive psychology understands social capital as a group or social phenomena that adds value by increasing trust and information flow around an organisation, however it can also be understood from an economic perspective.

From this perspective it can be defined as a combination of the number of relationships some one has, the economic usefulness to them of those relationships and the quality of them: effectively, how well known someone is, in what circles, and with what degree of affection. It is the social capital in an organisation that means that we care about the effect our work will have on the next part of the production chain, rather than slinging substandard work over the functional line saying, ‘done my bit, their problem now’.

Why Is It Important In Organisations?            

It is the social capital of an organisation that influences the return gained on the value of the financial and intellectual assets. It is what makes the whole greater than the sum of the parts. It is social capital that releases organisational good citizen behaviour, high-level motivation and that ‘good feeling’ about work. Social capital is the antidote to the ubiquitous silo mentality that permeates most larger organizations: the tribal mentality that can act against the fullest realisation of the potential value of the organisational assets.

An organisation can purposefully invest in this valuable source of capital like any other. And as with any other investment, it is possible to identify the areas of investment likely to create the greatest return, and therefore carefully target investment activity. For instance it is probably not going to boost an organisations’ social capital if it invests in helping the canteen staff to get to know the board as much as it would to invest in building social capital within the board (which isn’t to say that the first option doesn’t have some value, and in some situations might have the greater value).

Why Don’t Organisations Invest More In Social Capital?

Often leaders can intuitively see the value of social capital, however an 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 similarly non-physical form of capital, does show financial returns that can be directly attributed to it on the balance sheet e.g. licensing revenue and royalties; these returns can be used by leaders to justify the initial investment they made in developing intellectual capital. At present no such mechanism exists for capturing and measuring the return on social capital investment.

Measuring the Economic Value of Social Capital

It is tempting to conclude from this that social capital can never exist in the financial sense in the way that machines, buildings and patents do; that it is not worth leaders making the additional effort to try and identify its effect on the balance sheet. Recent developments in economics suggests such thinking can be challenged. Social capital not only exists as a factor in economics, but exists to such a real and definable extent that it is now used by banks as collateral for loans, particularly micro-loans.

The Micro-Finance Story

Billions of dollars have been lent to (and repaid by) tens of millions of people in areas of the world where social capital is the only form of capital available, and not just in the third world: if you’re reading this in London, Manchester, Birmingham or Glasgow, to name but a few places, this is probably happening within a few miles of you.

Social capital is the basis of micro-finance, the practice of lending very small amounts of money to the very poor. It has already revolutionised development policy across the world. The problem, identified by Muhammad Yunus in Bangladesh in the 1970s, was that the poor couldn’t borrow money from commercial sources not because they couldn’t pay it back but that they had no incentive to do so. This was because they had no collateral that could be repossessed if they defaulted. As a consequence no private lenders were prepared to lend them money.  Yunus’s experience with the Grameen Bank, and that of other micro-finance institutions, is that the poor, properly incentivised, have the highest repayment rates in the world when lent small amounts, almost 97%.

Yunus incentivised individuals by making possible future loans to others in the village conditional on the repayment of the loan by each borrower. In other words, he secured the loan against each villager’s social capital. If she defaulted, none of her friends or neighbours would get loans and she (the vast majority of micro-finance customers are women) would be persona non grata in the village. This suggests thatfor a particular individual her stock of social capital must be worth more to her 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 social capital. This clear behavioural indicator of choice suggests that a financial value can be put on an individual’s social capital.

Can Social Capital Be Measured In Organisations?

The micro-finance experience suggests that social capital can be measured.  The question is how can organisational leaders find a way of making such calculations for the stock of social capital in their organisations?

There is not a yet a clear answer on this. We can begin to recognise the social capital in organisations by reflecting it in our ways of talking about our organisation. For example referring the member of staff who takes time to contact colleagues to check out their needs and expectations, or who takes the time to let others know something has changed so they don’t waste their time, as invaluable, doesn’t help us recognise the value she adds. On the other hand saying she, and her actions, are valuable, starts to lead us to ask the right questions about ‘How valuable?’, and ‘How can we measure that?’ and ‘How much value does that behaviour add?’

How Can We Build Social Capital In Organisations?

We may not yet know how to measure social capital in organisations with any financial precision, but we do know how to invest in it and build it. Organisational development activities developed over the last few years, based on an understanding of the organisation as a living human system, act to increase social capital. Appreciating Change is an expert in these social capital investment activities.

Article by Sarah Lewis and Jem Smith

Other Resources

More on using Appreciative Inquiry and other positive psychology techniques at work can be found in Sarah’s book Positive Psychology at Work.

See more Thought Provoking articles in the Knowledge Warehouse.

APPRECIATING CHANGE CAN HELP

Appreciating Change is skilled and experienced at supporting leaders in working in this challenging, exciting and productive way with their organizations. Find out more by looking at how we help with Leadership, Culture change and with employee Engagement.

For further information on these alternative approaches to change, please contact us or phone 07973 782 715