"Social capital” as a concept is relatively new, multifaceted and imprecise. “Hard data” on what it is and how it should be measured is therefore not readily available. Companies often only report on the money they invest in communities, but seldom know how much value – or social capital – they’ve created. Much of what is measured is reporting activity, as opposed to outcomes.
This is understandable, as it is almost impossible to measure and assess such an intangible asset. As a result, companies struggle to integrate the development of social capital into their strategic planning and communication, and do not understand how much value they add, whether it is necessary to invest more, as well as exactly where and how to invest. This often results in undervaluing and underinvesting in the social resources and relationships on which the business depends.
It is clear that the measurement and management of corporate performance must evolve to incorporate social performance alongside financial and environmental performance, not only to comply with King IV’s requirements for integrated reports, but to build social capital in a meaningful way, for the company, its people and the communities and environment in which it operates. Running a successful business and running a responsible and sustainable one should be two sides of the same coin.
Companies that take the development of social capital seriously have reported that investment in social capital brought about several benefits, including improved reputation and stronger stakeholder relationships that ultimately enhance business resilience and increase competitive advantage.
What is social capital?
Depending on where you stand, social capital may have a variety of meanings, but in essence it is:
The value a company adds to society by the organisation’s products, services and activities, as well as the relationships within and between communities, groups of stakeholders and other networks.
Researchers tend to summarise the components of social capital in four broad categories:
- Networks, relationships and connections
- Trust and reputation
- Civic engagement and voluntary activities (including cooperation, political participation, social participation, associational memberships, community volunteerism, etc.)
- Civic norms, shared norms, trends and values
Social capital shouldn’t be confused with human capital, which is mainly the knowledge, skills and talents of a company’s workforce and the development thereof. A company can for example create social capital by investing in the capacity (effectiveness, sustainability, knowledge and skills of an NGO) it funds through its corporate social investment initiatives, and an organisation can quantify and qualify its impact. For instance, if an NGO was cash-constrained, it can become more sustainable and effective by acquiring fundraising or crowdfunding skills). The capital created is shared – the company benefits (by having better capacitated people/organisations to implement its CSI programmes) and the NGO benefits as well, because it is more sustainable.
Measuring social capital
It can be said that one of the greatest weaknesses of the social capital concept is the absence of consensus on how to measure it. Social capital is, by nature, more subjective than other capitals such as financial, natural, manufactured and intellectual, and also less developed.
There is no one-size-fits-all process or plan that can be followed. Every organisation should find its own approach depending on its industry type, existing processes and organisational culture. This will take time, as it will be coupled with trial and error.
A company would know that it has created social capital by measuring the effect of what it has gained through its social or community programmes. For instance, because a company has invested in a specific development portfolio (e.g. education or health), its customers value it more highly. The social capital is therefore measured by the value it contributes to the reputation and brand of a company. In other words, the perceptions of our customers are more positive, they are more loyal and they buy more products and services from us. This could be calculated by putting a financial value to customers’ perceptions and loyalty.
How do we go about it?
The most important thing is to simply make a start – and keep it simple. Either design measuring tools from scratch or enhance what you already have.
Understand the company’s current decision-making processes, and determine the type of social capital information that will be useful within these processes to enhance business and societal outcomes. Identify how social capital links to your strategic objectives and focus on those areas that are most relevant to decision-making.
Try different options and determine the best way to inform and enhance decision-making to develop resilient and sustainable business models.
It is important to recognise that not all social capital that is created is positive. For instance, by not procuring locally, by not recruiting locally, by not investing in local communities or supporting local governments, companies can reduce their social capital. Evidence may include where there is community activism evident, community unrest against the organisation or boycotts against a particular brand or organisation.
2. Measure it
Social capital is such a complex concept that it is not likely to be represented by any single measure or figure. The multiple dimensions require sets of indicators to be effective. When measuring it, first determine the basis of information, the method of collecting it and what to calculate.
Ask questions like:
- What is the real problem and what should we be fixing?
- Is our focus on delivering social outcomes or perpetuating activity?
- If we fix this problem, do we solve the real problem?
- What connected issues should we be fixing?
Positive or negative social capital can be measured by a company’s relationships. For instance, when a company is applying for a licence or renew a licence to operate/trade, communities may withhold their consent. This is evident through, for instance, input into environmental impact assessments (EIAs). It could be as a result of negative environmental impact from operations, and then the company is no longer regarded as a welcome citizen in the area. Communities therefore vote not to participate in EIAs, or declining consent for granting or extending a licence.
By improving stakeholder relationships and engagement, companies can increase social capital if relationships improve and therefore additional social capital was created. Companies can also measure the direct impact of a licence being withheld or suspended, as it is directly linked to financial performance and loss of revenue and production.
Evaluation refers to the process of estimating the relative importance, worth or usefulness of social capital to people in a particular context.
Decide how to evaluate the results of your assessment and apply those findings to your business’s decision-making. Apply at multiple levels: corporate, operating division, project and product development. Assess underlying data to ensure that it is robust, comparable and reliable, and can be trusted by decision-makers. Use the results to help drive business success and maximise social contribution.
Companies can also create and contribute to future social capital. For instance, by investing in the youth, by providing future skills for a knowledge economy, a company can influence its future talent recruitment and retention practices and as such invest in the creation of future social capital. A company can measure this and assess its success in this regard by calculating how much was invested in the youth, what skills were acquired and the value thereof, and the costs saved through recruitment and retention.
The assumptions, valuation techniques and methods used to determine the value of social capital created should be clearly stated.
In some cases, instead of using an absolute number, it may be more representative to show a range, and it could also be beneficial to the user to show the level of confidence in the data.
Credibility is enhanced by being transparent about gaps and uncertainties, and ensuring that negative as well as positive impacts are captured. Where there is uncertainty in the process or results, this should be stated and an explanation given for why a judgement has been made.
When reporting on the social capital created (or reduced), a company can measure the value of its relationships, for instance with suppliers. Because of good networks and stakeholder relations, the company was able to procure goods at a lower price, better terms, or in a retail scenario paid less for shelf space, got paid quicker and received better discounts.
Typical indicators for measurement and reporting may include:
- Extent of trust in supplier or trade union relationships (positive or negative)
- Customer or employee perceptions (increase or decrease)
- Product or service boycotts, media mentions, policy influence and contribution (positive and negative)
Who must do what?
It is imperative that social capital information does not reside exclusively in the CSI department or the sustainability team. This information should flow into and out of key decision-making processes, also on executive level.
Finance teams and corporate affairs divisions (the custodians of stakeholder relationships) are essential for the integration of social capital information into decision-making. Their experience in fields like prioritising information needs, analysing data, and how to prepare and communicate management information are all qualities that can be applied equally to monetary and non-monetary information.
The growth of sustainability and integrated reporting frameworks has put a spotlight on the importance of social capital. It is therefore foreseen that managing social capital and the ability to measure and report on it will increase in the future.
Author Reana Rossouw is one of Africa’s leading experts on social innovation, sustainable development and reporting. As director of Next Generation, a specialised management consultancy, she believes strongly in contributing to the development of the sector.
Next Generation presents annual master classes on social innovation, CSI and related aspects, providing practical, useful discussions with real-life examples to improve the quality of your work and the impact that you make. Contact email@example.com to get details about upcoming classes and to secure your seat.