There are five forms of wealth, capital, that form a circle of wealth generation. These are Spiritual Capital, Social Capital, Human Capital, Innovation Capital and Financial Capital. Each section of this course provides an understanding of each form of wealth and presents a self-assessment and action planning model.
Following this path will generate wealth in your business and in your personal life.
Creating Sustainable Wealth
A Synopsis of the Five Forms of Capital
Stephen Covey wrote that “If you want to make minor, incremental changes and improvements, work on practices, behavior or attitudes. But if you want to make significant, quantum improvements, work on paradigms.” In Sustainable Wealth I am proposing a paradigm shift in how we personally pursue wealth and how our corporations create strategy to enhance the creation of value for their shareholders, employees, and society.
Money is not in the beginning. The word, the creative spirit, purpose and values, are in the beginning. The cycle of wealth begins with a creative act of leadership that inspires unity of energy and effort. The ideas, the creative spirit, purpose and values – spiritual capital – come first. This then generates the wealth of social and human capital that stimulates innovation capital and finally results in financial capital. If not managed properly, it ends with decaying financial capital piled onto a failed moral scrap heap; an empty shell consumed by material illusions of wealth.
To the degree that an organization can enable, support, or encourage a depth of personal morality and dedication to a noble purpose, it possesses spiritual capital. I sincerely believe that this form of wealth accrues both to the organization and to the individual. It will interact and support every other form of capital and ultimately will have its effect on the financial bottom line. In many ways it is the first cause.
The pursuit of worthy purpose is the primary means of achieving energy in an organization. Human beings are energized by, and will sacrifice for, that which they believe to be noble and therefore ennobling of them. Leaders create energy that may later be directed by managers, but absent the energy that comes from a worthy purpose, there is little motion. Any manager who believes that only technical processes, skills, or financial capital are required for competitive success is much like the racing team that spends a million dollars for the latest racecar but then hires a driver who doesn’t care about winning. Purpose matters. Ennobling purpose matters most.
Shared values are the basis for trustworthy relationships and sociability. Belief systems have enormous impact on the culture of organizations, and it is the function of leaders to exert efforts to intentionally shape these beliefs. A common set of values is the lubricant of fluid associations. It is the basis of unified action and trustworthy behavior.
Social Capital is the value of trust. The degree of trust you engender in others will determine the likelihood of being hired, customers purchasing your products or services, or, employees working, even sacrificing for your company. It defines the likelihood that others will engage you in solving problems. It is a key to the effectiveness of all teams, families or communities. It determines brand equity and market capital. Entrepreneurs often begin their business within a small circle of trust and gradually expand the radius of trust, increasing the scope of their network and their business.
To analyze the current state of social capital and plan the future, it is important to drill down to a more functional level. There are two types of social capital that may be assessed: internal sociability or trust, and external relationships or brand equity.
Internal social capital is the level of trust within the organization. Trust operates both horizontally and vertically within the organization and is critical to the ability to solve problems, innovate, and satisfy customers.
Internal sociability may have the most significant impact on the ability to solve problems. All organizations are a continual stew of problem solving. Whether it is solving the problems presented by a customer, a new technology, or a competitor, business is a game of constant adaptation to a changing environment. The apparently small act of walking down the hall to an associate’s office and sharing a problem, casually brainstorming without regard to who gets credit, or who bears what responsibility, is the most frequent, and probably the most effective way to solve problems. These encounters may escalate into a formal meeting or problem solving process. Whether the interaction remains highly informal or becomes more formal, the critical ingredient is the simple willingness to be engaged, to care about the problem, to listen deeply, think together, and brainstorm solutions.
External brand equity is the recognition and respect given to your firm by the market place. Just as the quality of an individual’s life is largely determined by the quality of their social relationships, the same may be said of a company. The value of a company is directly related to its brand equity.
Human capital is the sum of all of the competencies and motivation of the people within the organization. Human capital has always been a critical component of the performance of any business, but today’s entrepreneur is likely to bring with him, not money, but competency and motivation, the two key ingredients of human capital.
Motivation has been the subject of hundreds, if not thousands of books for managers. When all is said and done, the keys to motivation are relatively simple: work that is interesting and ennobling; sincere recognition by peers and superiors, opportunities for career advancement, positive feedback that can guide performance, strong and supportive social interaction by a team, and, oh, did I forget? – fair and attractive financial rewards. There is little reason to waste time in the endless debates about which is more important: money, recognition, or enriching work. They are all motivating and different personalities are more or less influenced by different types of incentives. The job of designing an organizational system is to optimize all of the various forms of motivation. Over-reliance on any one form is a prescription for poor performance.
Human competence is the only modern parallel to production technology of the past century. Modern production most often occurs in the mind, or the collective mind of a small work group. If you have highly trained marketing professionals, skilled sales men and women, great engineers and brilliant financial managers, you have an important form of capital. These competencies are a foundation of performance. Investment in these assets is likely to pay off in the creation of other classes of assets.
Those organizations that have exhibited the greatest dedication to the development of human competence have consistently outperformed those who have only given lip service to training and development. General Electric, Microsoft, Toyota and other companies that have grown into great economic powers have done so as a result of both attracting and developing the most competent people.
Innovation grows in the soil of spiritual, social, and human capital. To the degree to which there is commitment to a worthy purpose, spiritual capital, members of the organization will engage in the discretionary effort of thinking, exercising their brain on a problem or opportunity. Many creative ideas occur on the weekend or in the evenings, when a member of your team is choosing, even unconsciously, to think about a problem at work or a customer’s needs. This is discretionary effort, effort that cannot be forced, measured, or required. It only occurs when employees genuinely care about the success of the organization.
Innovation thrives in an environment of high trust, social capital. Most innovations are not the product of one person thinking alone. Rather they are the result of thinking together, sharing ideas, brainstorming and allowing your idea to be criticized by your associates. High trust cultures, in the larger economy and in companies, are high innovation cultures. If you examine low trust cultures, such as in the Middle East, you will find very low rates of innovation. Companies in which there is a culture of fear, rather than a culture that celebrates successes, will have low rates of innovation.
The degree of competence, the continual education of employees, lays the foundation for high innovation. When an individual is continually seeking the latest knowledge, the latest experiments, the latest inventions or theories, his or her mind is playing in the intellectual waters in which innovations float to the top.
The success of Honda and Toyota over U.S. automobile companies was the result of their fanatic dedication to process, manufacturing and product or technology innovation. The success of Wal-Mart, Home Depot, L. L. Bean or McDonald’s is all about process innovation in their industries. Processes either create or minimize cost. They assure either consistency and reliability or the unfortunate alternative. Like other forms of capital, the quality of the work process and technological innovations that create an advantage for customers is a significant asset.
Innovations may be one of four types or a combination of types: They may be innovations in a product delivered to customers, or they may be innovations in process, how they are delivered or produced. Either product or process innovations may be small incremental improvements; or they may be large game changing breakthroughs. The way each of these is encouraged is different.
Financial wealth is the natural result of the pursuit of the previous four forms of capital. Most people who make a great deal of money do so, not because they were pursuing money, but because they were passionate about their innovation and their service to their customers.
Financial capital is in two forms: Positive Cash Flow and a Postivie Financial Balance Sheet. In your personal life you may feel wealthy if your income exceeds your expenses, at almost any level. If you make one million dollars a year, yet you are spending one point two million, you will feel poor. Part of the “trick” of wealth is to manage the relationship between income, expectations and expenditures.
In this course I will not provide specific financial advice because I do not know the cirumstances of any student. I will merely provide some general principles.