social capital
Going beyond financial and human capital

The Affluent Organization: Determining Organizational Wealth in the New World of Work

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Like many recent college graduates, I’ve spent a lot of time thinking about the following questions over the last few years:

1.) What sort of company might I want to work for? How can I be more certain I’ll work for a company that is both a successful enterprise and one that helps me rapidly learn and grow?

2.) How can I think about beginning to invest some of my savings? How can I figure out which companies have the potential to sustainably deliver customers value over the long-term, rather than just focusing on short-term profit-taking?

The triple bottom line (TBL) changed the way a lot of us thought about for-profit organizations. I know it did for me. TBL gives us a way to think about how organizations can measure their success by taking into account their impact on people and the planet—not just profit. By adopting the triple bottom line, organizations acknowledge that profit is not the only measure of success.

Could we apply a more holistic view to how we view the valuations of organizations as well?

If I asked you how much a for-profit organization is worth, how might you go about figuring that out? You may start by looking at your organization’s total assets and then subtracting its liabilities. For assets, you may include items like cash, real estate, and any machinery it may own. From those assets, you would then subtract the organization’s total liabilities, including items like loans, accounts receivable, etc. This is an intelligent way of answering the question. But it misses so much.

An organization’s worth—its wealth—includes far more than financial and physical capital. Producing valuable goods and services requires more than money and machines. It requires people.

As this point has become more widely recognized, interest has increased in improving human capital within organizations. Commonly, we think of human capital as the enhancement of employee capabilities. For example, employers may enhance their human capital by providing employees with college tuition subsidies or in-house skills training.

Broader definitions of human capital also include the know-how that’s received by working for years within a specific organization, industry, or even using a specific piece of software. As the Economist explains, 20th-century economist Gary Becker observed that some human capital is very general, meaning that a large number of firms can benefit from it. Knowledge of Microsoft Excel is an example of general human capital. Developing your Microsoft Excel skills may not only increase your productivity at your current employer, but also may help you be more productive at a variety of other employers.

Becker pointed out there is also specific human capital. For example, a manufacturer may design its own machinery that is unlike any other machinery used by other manufacturers. When a worker learns how to use this machinery, it helps him be more productive at this manufacturer, but it does not help him be more productive if he were to get a job working at another manufacturer.

This human capital—both specific and general—combined with financial and physical capital provides a much more complete picture of an organization’s wealth. But not a perfect picture.

Why not?

The problem is that even if an organization has billions in dollars in cash, some of the world’s most brilliant employees, and state-of-the-art technology and office space, it cannot produce products or services of value with these elements alone. The three-form capital model says nothing about how the work is actually done. Without that knowledge, the organization will fail to generate revenue. Its brilliant employees will become frustrated with the lack of results and leave. Eventually, the organization will burn through its cash until it can no longer afford its fancy office space and will be forced to sell off every last employee laptop.

What’s needed is social capital.

“The core idea of social capital theory is that social networks have value,” writes political scientist Robert Putnam.

These social networks rule our work lives. How work product moves from R&D to engineering to marketing to sales can make or break organizations. When work product is simply “tossed over the wall” from one department to the next without any collaboration, technically-great products can fail to succeed in the marketplace. But when employees from engineering, marketing, and other functions work together, the organization can produce products that customers love—and are willing to pay top dollar for.

The processes, organizational structure, and behavioral norms of an organization can greatly affect the value of its social capital. Processes that are collaborative help build social capital compared to those that involve employees working in isolation. Thanks, in part, to a popular notion of what has made a number of technology start-ups successful, cross-departmental collaboration and even cross-functional teams are gaining acceptance far beyond Silicon Valley.

On the subject of structure, large corporations have known for decades that managers need exposure to many different departments and business lines to be successful. Even if the corporation has a well-defined organizational chart, it also recognizes that much of the value produced by its employees occurs when work product moves across the organization in ways that executives are unable to anticipate. It is for this reason that many corporations use rotational programs for potential future managers.

For example, an entry-level employee may start her career with one of the corporation’s Shanghai-based marketing teams. A year later, she may work on a legal team in New York City. By the time she becomes a manager of a product development team in Houston, she will have accumulated not only the “know-how” associated with marketing and legal but also the “know-who” of different employees within the large corporation. And so, when she needs to help her team figure out how her team’s great new software idea might sell in China and if the team might be able to patent the technology, she’ll know exactly whom to call.

Behaviors—an organization’s shared norms for employee interactions—can be the most difficult components of social capital to build. But the right behaviors can also spell the difference between an organization’s success and failure. Organizations where employees exhibit transparency, accountability, and a drive to learn and grow will have a far easier time producing valuable goods and services than those that do not. What can be frustrating for executives is that even if they hire new employees who were transparent, accountable, and exhibited a drive to learn and grow in their previous organization, they may not exhibit those behaviors in their new organization—at least not for long. Once they see that transparency, for example, is not rewarded or even punished at their new organization, they may start hiding the challenges their teams are facing rather than sharing them. Therefore, bringing in top-notch human capital may not fix an organization that has problems with its social capital.

By working to improve its processes, structure, and behaviors, an organization can help improve its social capital.

The title of this post is a play on John Kenneth Galbraith’s 1958 book, The Affluent Society. Galbraith made two brilliant observations in this book. First, he argued that economic models developed at a time of worldwide poverty may be ill-suited for a world where an increasing number of individuals are wealthy. Second, using GDP as the sole metric for a country’s economic accomplishments is extraordinarily limiting.

Today, we live in a world of work where difficult physical labor is slowly but steadily being replaced by the creation, processing, and distribution of information. In the past, assessing an organization’s wealth by looking only at its financial, physical, and human capital may have made sense. Using this framework today would severely limit our view of organizational wealth. As Economist columnist Ryan Avent writes, “value in society is increasingly built on ideas, and the firms that do best in this society are those that can manipulate ideas most effectively.” Producing these ideas requires that an organization has more than just money, machines, and minds. It requires that an organization has a strong social network. And so, an organization’s wealth today can only be measured by taking into account its financial, physical, human, and social capital.

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Originally posted by CMG Associate Christian Knapp on LinkedIn