The world has changed since financial capital was the single form of meaningful capital enabling Adam Smith to define market price as the intersection of the financial supply and demand curves.  In today’s world with rapid and global information flow, knowledge workers defining new products and services, and an unprecedented rate of change, the old definitions of capital and return on investment (ROI) will not stand the stress tests required for survival.

David Morgan, CEO of Westpac of Australia, recently commented on his awakening. He said, “When I announced Westpac’s record profit in 1999, stakeholders did not react with acclaim.  The market reacted to the bank closing branches and laying off staff more than the profit.” 

The experience forced Morgan to rethink what the bank must do to be judged a success. These days, he said, “Westpac management now tries to manage for the broad as well as long and according to a set of values.”

As we continue to collect and assess case studies of excellent companies both new across the world, we become only more convinced that to remain or to build a thriving capitalist society, we too must adjust our definitions of capital and ROI. Just as for an individual there are multiple forms of intelligence, for an enterprise there are multiple forms of capital.   We define capital as factors of primary importance in achieving the purpose of the organization and creating a sustainable enterprise. 

We group these into five distinct and reinforcing types – financial capital, people and capability capital, emotional capital, environmental/quality of life capital, and political capital.   Each has its own ROI and each is a key contributor to a collective ROI that explicitly incorporates social responsibility considerations.  We distinguish between these five required types of capital as follows:

We do not have to search hard to find evidence that multiple types of capital are now marketplace realities.  Consider the demand side of the economic equation: The consumer is not merely buying a pair of Nike tennis shoes.  She is buying the brand, the image of the professional player who endorses that line. She is also buying the labor, the location of the factory, and everything associated with the production and materials of that pair of shoes, including the dollar being donated to cancer research. 

These aspects of her purchase are all part of the ROI on Nike’s emotional and political capital.  The same holds true for services. When she buys healthcare, she is embracing reputation and faith in the practitioner more than price charged.  Mandel, Katz & Brosman, a law firm, is engaging with its clients in serving the community and thereby changing their relationship from one of simply price paid for services rendered to one that responds to the firm’s people and capability, emotional, and political capital investments.

Likewise, consider the supply side. It’s not just about product, it’s about capabilities and consumer experience. Developed countries spend almost half their GNP on healthcare, education, and leisure activities.   New technologies and service industries add almost another 25%.  When any airline sells an airline ticket, the people and capabilities – the service – matter to the flyer more than the capital or planes (and that decline in service might be one reason so many consumers are now disenchanted with flying).  Bright China’s focus on investing in the community by supplying critical needs (e.g., education) also builds up its people and capability capital by attracting some of the best and most passionate knowledge workers to the organization.

The Cleveland Clinic is a groundbreaking example of an enterprise investing in social assets and changing the game.   The Clinic is focusing on the value of local capabilities. As the largest employer in Cuyahoga County, it recently anointed a chief wellness officer, and gave him an office right in the clinic’s C-suite.   His job is to make everyone in the county healthier, and help Cleveland become a more competitive work environment.

In a world where multiple factors play into the creation of a customer and investment in the future, the companies highlighted above provide an array of provocative and useful models of organizations where social responsibility is embedded in the fabric of the enterprise. These companies and their models are included in our case studies, which we hope will provide transferable learnings.  We welcome your additions and comments.

©Druckerinpractice

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The purpose of the Blog area is to make the synthesis available to a wider audience, and to gather feedback on the question, the synthesis, and the overall project.