Chapter 8
Remunerating the New Forms of Capital
For the love of money is the root of all kinds of evil. Some people, eager for money, have pierced themselves with many griefs.
Saul of Tarsus
In the previous chapters, we have outlined a number of ways in which it is now possible—for the first time—to define and measure “new” types of nonfinancial capital: specifically, human, social, and natural. We have also shown how a holistic approach that embraces all of these forms of capital can be highly profitable, given the link between them. This, in turn, validates the truth of the ancient principle of wise King Solomon quoted at the beginning of this book:
A man may give freely, and still his wealth will be increased.
Nevertheless, a major question remains unanswered: How are the various forms of capital to be remunerated and what impact will this remuneration have on the notion of the right level of profit? This is a crucial issue because the most obvious and straightforward answer would be to try and monetize them—to convert the benefits of, say, natural capital into financial terms, in the misguided belief that money is the only language business can understand. As the late British playwright Oscar Wilde once wrote, “We know the price of everything, but the value of nothing.” How true.
The temptation of monetization
The assumption by many we have encountered that everything must be monetized is an erroneous one in our view, yet some are beginning to seek answers in the broader “multiple bottom line” space. This common monetization misassumption falls into the Friedmanic trap of seeing business as primarily driven by the maximization of financial profit to benefit shareholders, or in the best case, in a very disproportionate way to stakeholders. After all, one could in theory affix what would be largely arbitrary monetary equivalents to variables like “trust,” “prospect of upward mobility,” “capacity for collective action,” “relationship with one’s line manager,” “social cohesion,” or “walking the talk of espoused values,” for example, but what good would this do? And more importantly, how accurate could such figures possibly be? Moreover, would not the monetization of the nonfinancial forms of capital overvalue the relative importance of financial capital in the new knowledge economy, at the expense of properly valuing the other capitals, thereby distorting the whole approach?
The main point of expanding the basket of metrics available to business managers to include nonfinancial forms of capital is to give them tools to manage hitherto unrecognized (squandered) assets available to them. Our view is that this will, in turn, gradually expand their understanding beyond their current financial capital tunnel vision because they will begin to appreciate that human, social, and natural capital actually do have measurable value, are correlated with one another, and can be intentionally mobilized by the business to deliver greater overall performance. In the end, our hope is that there will be a tipping point among business managers where they begin breaking out of the now dysfunctional Friedman paradigm into a new construct that recognizes the true value of people, communities, and natural resources, and their relationship to economic output. Monetizing what cannot be accurately monetized just because the common business language today is all about money is a dangerous trap.
A more complete approach
In stark contrast to the monetizing solution, we argue that, like in nature, where living beings (vegetation, creatures, etc.) are created and reproduce according to their kind, constituting an interconnected ecosystem, the new types of capital need to be remunerated with similar forms of capital—in other words, human for human, social for social, natural for natural. The thought that one form of capital (money) could be used to remunerate the other forms of capital would lead to confusion, in our view, adulterating the role of money. It would also be a form of self-deception, wrongly assuming that the destruction of value in, say, nature, could be entirely compensated for or offset by another, such as money. But before devising specific solutions to the question of remuneration, it is important to consider the three guiding principles behind our thinking about remuneration.
First principle—The Sabbatical
The etymology of the word “sabbatical,” reaching back thousands of years via Hebrew (Shabbat /
), Greek (σαββατιkos), and Latin (sabbaticus), indicates its longevity and enduring appeal. In Hebrew, the word Shabbat derives from the Hebrew verb shavat and although it is often translated as “rest,” it also indicates a proactive and intentional action (i.e., it is not passive) to abstain from work. The modern Hebrew word for labor strike (shevita, which is related to the verb shavat) refers to the proactive nature of the word to cease work. Shabbat is above all a personal and collective decision.
A form of Shabbat applies to the individual and to communities—one day of rest every week, as an artifact of freedom from the slavery of overwork. According to the Jewish tradition, Shabbat was immediately established after the liberation of the people of Israel from 430 years of slavery in Egypt (where the notion of rest did not exist). It is also the fourth commandment of the Ten Commandments, coming before the commandments not to kill, steal, or bear false witness, and is the only holiday mentioned in the commandments. This notion of proactive rest, as an artifact of freedom from the different forms of slavery, is key in our view in that it illustrates how the concept of Shabbat (proactive rest) is foundational to human freedom. And it can be conceptually enacted as a form of remuneration for people, allowing work to be remunerated according to its “own kind”—for six days of work, there is one day of rest.
Another form of Shabbat applies to nature: one year of rest for the land in every seven years to protect from overuse. During this Sabbath year (also called shmita, literally meaning release), the land is supposed to lie fallow with all agricultural activity forbidden. Whatever agriculture is produced naturally during that year of rest is not meant for the landowner, but rather is for the poor, the stranger, and the beasts of the fields. This is an illustration of how the concept of Shabbat can be enacted as a form of remuneration for the land, allowing nature’s work to be remunerated according to its “own kind”—for six years of work, there is one year of rest. Note that during this Sabbath year, all debts between debtors and creditors are supposed to be cancelled and all slaves are to be released.
The final form of Shabbat is the Jubilee and applies to the notion of ownership, property, property rights, and money, i.e., in ancient Hebrew law, the year at the end of seven cycles of seven sabbatical years (shmita)—lasting one year (the fiftieth)—during which all land mortgages were to be returned to the original owners (or their heirs), debt was to be cancelled, and slaves could be released. This is an illustration of how the concept of Shabbat can be used to deal with ownership and accumulation of wealth across generations—which is ultimately linked to the remuneration of ownership in the sense of preventing the over-accumulation of wealth for too long in the hands of a few and that there is an opportunity (for every new generation) to free up the economy, giving all a fresh start—especially those needing a second chance, or to empower those who did not have enough of a chance to start with.
Although we believe these definitions of remuneration and the order in which they are presented (the people, then the land, and finally of ownership) are meant to be interpreted in a broader, perhaps symbolic rather than precisely literal manner, they map across to the four new areas of capital we have been discussing:
1. To individual people on leave (human capital)
2. To communities as a shared period of rest (social capital)
3. To nature, giving it a period to recharge and replenish its resources (natural capital)
4. To allocation of profit (shared financial capital)
In a more literal sense, the sabbatical (whether for a day, month, or year) could enable people, communities, and nature to be restored and reinvigorated, and—importantly—to become more sustainably productive as contributors to society at large. We suggest that offering periods of rest that are purposeful is highly beneficial to business and is ultimately more productive than working resources until they are exhausted, then moving on like a locust would. However, over the course of the last fifty years we have placed less emphasis on the idea of purposeful rest and placed more on Friedmanic profit maximization. We contend that this behavior damages individuals, communities, and nature. It is counterproductive, and humans, communities, and the planet all need periods in which they can recharge and replenish themselves. This is a crucial principle that informs our thinking about how best to remunerate human, social, natural, and financial capital, commensurate with the goal of sustainability.
Second principle—Remunerate on a like-for-like basis
We believe that these new types of capital should be remunerated on a like-for-like basis because monetizing them would be insufficient, problematic, and even distorting.
When we think about remunerating human capital, as one example, it is striking that an important proportion of the most important factors that drive up well-being in the workplace are not financial in nature, but instead relate to such intangible factors as the prospect for upward mobility, social recognition, and the alignment between corporate values and strategies. These factors do relate to financial performance of the individual and his or her employer, but indirectly. Therefore, in order to remunerate human capital, one must develop new business practices, programs, processes, policies, and organizational cultures that will enhance these factors—on top of delivering against conventional sources of individual well-being at work, such as wages, working hours, riskless environments, and the like. This will, of course, include programs of training and development in jobrelated skills, policies to include opportunities for employees to expand and develop into new areas, provision of time for reflection and creativity and for exposure to new ideas and thinking, and more.
Likewise, if social capital is being remunerated, it is important to remember that there are three general factors that tend to drive up this form of capital—trust, social cohesion, and capacity for collective action. Hence, remunerating social capital in a community requires that “new muscles are flexed” and that we develop new business practices that will include building new networks to connect people further and more meaningfully. These networks should offer new types of contacts and opportunities to leverage for the common good what each brings to the table, not just bringing people together or linking them as an end unto itself, but connecting them with the express purpose of building community. We want to provide opportunities for people to come together in dynamic ways to create innovations that build a better future for all.
When it comes to natural capital, this idea of like-for-like remuneration is even simpler. We can begin by asking how the system can be made better and more efficient as a result of the actions a business can take. Because natural capital measurement essentially comprises five meta variables (water, air, soil, and organic and inorganic material), remunerating it is essentially about ensuring that for every unit of natural capital taken from the planet, a unit of a similar or higher quality is returned to the environment, creating a positive return.
One very simplistic illustrative example of creating a positive natural capital return comes from a coffee-growing operation. After coffee beans are harvested, they need to be cleaned with water before they are dried and processed, and the easiest and most common solution is to wash them in water extracted from a nearby river. The problem this practice can create for the environment is that if the water used to clean the beans is returned untreated back to the river, it can pollute the river because it has been despoiled by the acidity of the coffee beans, creating a negative return on the natural capital for the river and surrounding ecosystem. To address this, the water used for bean cleaning can be treated (cleaned of the acidity) to create a neutral or even a positive return of natural capital (with interest, so to speak) when the treated water—which might now be of a higher quality than when it was initially extracted—is returned to the river. This is provided, of course, that the system used to clean the water does not create too large a footprint of its own.
Third principle—To further decipher and document links between the types of capital
Our research has indeed established promising links between raising the levels of social, human, and natural capital (measured with simple, stable metrics), with an outcome being greater economic performance as measured in financial capital terms. A growing number of pilots have now been completed across several business situations and geographies—with more pilots on the way—that suggest these relationships between the forms of capital are true in different places and situations.
As this methodology continues to develop across industries and business situations, we will develop over time a broad and deep knowledge base comprised of non-monetized and monetized metrics, resulting in new business practices that can deliver greater mutually beneficial outcomes, methodologies, and patterns of relationships between these new forms of capital. By collecting these findings, sharing them openly with like-purposed organizations, and refining the approach, we believe businesses can be equipped with the necessary tools to do business differently, managing different forms of capital and focusing effort on healing the most profound wounds in business ecosystems, all while nurturing healthy financial performance that need not be sacrificed for doing good.
As one might imagine, the obvious aim here is to identify the practices that maximize positive correlations and minimize negative ones. To achieve this, we must not only see these different forms of capital as interdependent—and for that, we need specific measures and reward—but also decipher the natural laws to relate them with one another. This weighing of capitals by what they bring to the equation would help bring real value into the system because we are beginning the process of establishing lasting real value as opposed to wildly fluctuating faux value based purely on perceptions because there is no true underlying value.
Fourth principle—Being intentional and determined to find the “right” level of profit
Determining what is a right level of profit, initially for our company but in ways that can determine what is right for all companies, has from the outset been a key objective of our research.
Today, the right level of profit is largely determined by what the major shareholders want (hedge funds, pension funds, private equity firms, the financial markets, etc.). The right level of profit is imposed from the outside on management through systematic benchmarking (external pressure). It is not emerging from the inside by what the stakeholders need within the firm’s business ecosystem to nurture sufficient growth and prosperity (internal pressure). Hence, we assert that to a large extent the level of profit of most firms is not real. Profits tend to either be too high (sometimes extracted in zero-sum ways that can create invisible but disequilibrium effects across value chains that damage stakeholders and the firm itself) or on occasion too low, as what is deemed “right” does not correctly account for the contribution and maintenance of the firm’s other forms of capital.
When profits are too high, conventional measures of profits are usually defined net of the cost of maintaining physical capital—plant, machinery, buildings, inventories, etc.—without taking into account the cost of maintaining other forms of capital—human, natural, and social. Such profits may, therefore, be a form of “false” profits in that they constitute a substantial overstatement of the true profit of a firm because they fail to reflect the actual cost of doing business in maintaining these other forms of capital. This tends to artificially increase the level of profit.
Likewise, when profits are too low, conventional measures of profits do not typically take into account the value other forms of capital bring to the business. The conventional management approaches ignore what might be considered the “hidden riches” inherent in the other forms of capital and, therefore, do not know how to harness them for the good of the firm and its stakeholders. This dynamic also tends to artificially decrease the level of true profit.
In a similar vein, not all business ecosystems have the same profile of “brokenness” or of “healthiness” as regards the other forms of capital, yet this is not reflected in the level of profit. One can argue that the more broken an ecosystem is, the lower the level of profit should be, as the more important proportion of the financial value generated by the business should be reinvested to repair the most fragile links in the value chain, or what could be described as the most acute pain points of the stakeholders in any ecosystem. The opposite is also true, that the more healthy an ecosystem, the higher the profit should be.
Some business ecosystems are dysfunctional, not infrequently abysmally so, while others are more healthy as regards their management of nonfinancial forms of capital. Some business ecosystems, for example, are very respectful of the social, human, and natural capital of their environment, while others are truly aggressive—exploiting in a ruthless manner the environment, people, and communities. There are many examples in both categories, and as a result, some business value chains are stronger than others. Since any chain is only as strong as its weakest link, some value chains have more consistently strong links than others, which can be quite vulnerable. The issue is that oftentimes, even within a given business ecosystem, some stakeholders behave in a responsible way, while other behave irresponsibly. Hence, the need to embrace the issue from an ecosystem point of view, not from an individual firm perspective. And, the true value of a business ecosystem is not only in the strength of its individual stakeholders, but in the strength of the links connecting them. This natural law is not reflected yet in existing business practices and performance metrics, and this is precisely the gap that we want to fill.
Based on our still somewhat preliminary, but promising—potentially breakthrough—findings, we are exploring along with our partners from Oxford and elsewhere how to approach the new notion of the right level of profit for a firm. We have chosen to go beyond the conventional notion of profit and the conventional boundaries of the firm, which, in our view, artificially limit the responsibility of the firm. To that end, we introduce the notions of sustainable profit and of mutual profit, and are developing an approach to operationalize these notions.
To illustrate what to many may still seem to be rather abstract concepts, we use examples like the aforementioned one from coffee production, whereby washing the harvested coffee beans pollutes water supplies when the wastewater is reintroduced to the source and can cause environmental damage. Existing measures of profit from coffee are, therefore, not a correct statement of the sustainable level of profit. In evaluating how to restate coffee profits to reflect this one element of mismeasurement, we have looked at alternative technologies for cleaning the water and extracting pollutants, in particular, sugar. This involves investing in equipment and ongoing costs of running that extraction equipment. Together, the cost of capital and the operating costs are the total additional costs of making this part of the value chain more sustainable.
More importantly, however, this exercise also demonstrates the relationship between sustainable and mutual profits because in the process of investing in technology that can extract pollutants from water, the same equipment can be used in other ways to extract sugar from various sources that can, in turn, be converted into ethanol, which can be sold as a source of energy. Such dual-use investments not only can service a positive natural capital function for the firm, but can also in theory create a new revenue stream to offset the cost of treating water contaminated in a coffee-cleaning operation in a way that not only returns natural capital back to the environment, but does so at a profit rather than a financial capital deficit. In this way, a cost becomes a profit in a way that is mutually beneficial to the firm, the environment, and the surrounding community—a “win-win-win.” This basic example helps to explain the notions of sustainable and mutual profits, showing how they are related and how both concepts might be practically implemented as a new management technique. While this specific example is about natural capital, similar approaches can be applicable to human and social capital to derive sustainable and mutual levels of profits that account for the costs and benefits of maintaining these other forms of capital.
In conclusion, while there is nothing yet big enough to replace existing capital, we must now work to develop it. We do not underestimate the task. In 1995, Professor C. K. Prahalad asked, “Why can’t we create inclusive capitalism?” Eleven years later, he published a book titled The Fortune at the Bottom of the Pyramid, outlining why he thought inclusive capitalism could work by drawing the majority of the world’s poor into profitably productive work. He argued that the billions of souls at the so-called “base of the pyramid” financially—the poorest of the poor—is where the greatest opportunities can be found for entrepreneurship.
After another decade has passed, however, that goal still remains an elusive one, though we believe Prahalad was essentially correct. What was missing from his original conception, in our view, was the measurement of different types of correlative capital and the idea of like-for-like remuneration of the various capitals. The promising results of our work thus far in bringing entrepreneurial opportunities to the poor in Nairobi, Manila, and very soon in Uganda and Côte d’Ivoire (then China, India, and elsewhere) will make this assertion even more compelling as additional supporting evidence from different markets is gathered.