The newly revisited concept of social capital is now prominent in several fields of social science. For Next Generation Consultants, the concept became important with the introduction of the integrated reporting framework that requires companies and organisations to report on how their activities either contribute to or diminish capital formation. The International Integrated Reporting Council’s guidance suggests that a company’s public report should include information about six forms of “capital” as inputs and outputs of the value generation process. One of these is social capital, which focuses on “institutions and relationships”.
Despite this focus, it is remarkable how little structured attention is often given to assessing and improving relationships in business. There is still much uncertainty about what social capital really means and why and how it should be measured.
A report commissioned by the Network for Business Sustainability South Africa has gone some way towards addressing this uncertainty. Based on a review of 314 studies, the report defines social capital as the ability to secure or obtain resources, knowledge and information through relationships with and among individuals and groups.
It also surmises that social capital has three dimensions:
- The shape and structure of networks of relationships
- The quality of these relationships in terms of trust and reciprocity
- Shared norms and values
Relationship capital or social capital?
The study’s main premise is that social capital is actually relational capital. It states that these relationships can be among the internal stakeholders of an organisation (e.g. employees) and between an organisation and its external stakeholders (e.g. consumers and regulators).
- Relationships among internal stakeholders give rise to enhanced efficiency and reliability in managing operations, projects and innovation. This is because of improved sharing and dissemination of information and knowledge, and enhanced commitment and retention of employees.
- Building external social capital contributes to competitive advantage and cost reductions, because it enhances access to external information and knowledge. It also builds the firm’s reputation among key stakeholders, such as customers, regulators and prospective employees.
The study concedes that companies also benefit from the positive impact of social capital, specifically in community and in social development, as it creates a more conducive business environment, for instance it is easier to do business in local communities surrounding a firm’s operations if there is positive social capital being created through social investments.
The report makes the point that the intangible nature of an organisation’s social capital makes it a powerful strategic asset, but it also makes it difficult to measure. Such measurement can enhance proactive efforts to grow this asset, and of course it is important to do so as it is necessary to respond and report effectively according to the integrated reporting guidelines.
Measuring social capital
The challenge to measure social capital is something Next Generation set out to tackle. Because of our work in the space of social investment and development the value of social capital became very clear, very quickly. This is quite simply because companies are investing resources in society through their corporate responsibility and social investments. Because our company measures the impact and return on investment of these interventions, we are able to prove whether and how a company’s contribution, i.e. social investment, contributes to the formation, growth and impact of social capital.
It is our belief that social capital is a useful form of capital to measure because we have also recognised that the utility of social capital depends on its convertibility and contribution to other forms of capital. The question we set out to solve was why social capital is referred to as “capital” if there is no true way to measure it? And that is what we have tried to do through our Investment Impact IndexTM. Through our impact assessment methodology, we have been able to measure the impact of resources (capital) that are applied to generate social capital as well as social and shared value.
Value of social capital
While social capital is about networks, trust and shared values, social value creation is about the substantive improvement in people’s wellbeing, as measured by indicators of health, education, income, and so on. These are distinct concepts, but they are closely interrelated: Social capital enables social value creation, and a company’s contributions to social value creation enhance its social capital.
The value generated for the organisation is referred to as return on investment, while the value generated for society is referred to as impact. As such, we measure return on investment, meaning increased social capital, in aspects such as improved stakeholder relations, improved reputation, increased access to capital and improved operational trading environments, i.e. freedom and licence to operate.
The social capital generated for communities in which companies invest is measured in aspects such as improved access to health, better quality of education, improved management of natural resources, as well as diminished risks of political instability, crime and protests, to name a few. In other words, social capital also creates measurable shared value.
How we measure social capital
Although we concede that there is universal agreement that social capital is difficult to measure with a high degree of validity, we wanted to provide an opportunity rather than shy away from complexity. As such, we created the Investment Impact IndexTM that we developed over the past ten years.
This impact assessment methodology aims to achieve two things:
1) What is the impact that was achieved through social and impact investments?
2) What did the investor gain, i.e. return on investment, by making these investments?
And as it relates to this article, what social value and social capital was created in the process? What have we achieved?
The Investment Impact IndexTM measures change and impact on three levels:
- Micro: Individual or specified beneficiaries
- Meso: Other stakeholders, i.e. indirectly affected or additional stakeholders – the broader community, other funders, intermediaries, etc.
- Macro: The sector at which the investment was targeted, e.g. education or health
Similarly, we measure the return on investment for the investor:
- Micro: Direct benefit, for instance reputational benefits that are directly linked to social capital
- Meso: Indirect benefit, for instance improved stakeholder relations that lead to improved licence and freedom to operate and is directly linked to social capital
- Macro: Additional benefit, for instance the ability to contribute to community empowerment, social cohesion and social justice, and the ability to influence and contribute to policy which is not only directly linked to social capital, but also shared value
We are very conscious of the fact that much of the data we use to measure social capital is subjectively derived, which is why we use primary, secondary and tertiary information sources to ensure evidence and proof of impact.
Over the past ten years we have measured the impact of R4 billion and we have assessed more than 1 000 programmes. Measuring social capital was never the primary focus, but we have been able to prove that social capital can be measured and that social value can be generated and, most importantly, reported on. It is our wish that more reporting organisations would use this methodology to prove that social capital can be created through social investment and can be reported on because there is evidence of an increase in social capital formation.
Author Reana Rossouw is one of Africa’s leading experts on social innovation, sustainable development, shared value and inclusive business strategies. As director of Next Generation Consultants, a specialised management consultancy, she believes strongly in contributing to the development and capacity-building of the sector. She presents practical, useful, interactive master classes on (1) Stakeholder engagement and management, (2) Human rights management, (3) Strategic social investment and (4) Monitoring, evaluation, impact and return on investment assessment. See the full brochure (including dates and booking details).