As climate change trumps the headlines and the effects of climate change become apparently visible globally, companies are looking for new models to build their businesses. And countries are looking for new ways to shape their economies.
Enter complete capital, a transformative way to look at capital. A way which can build better business and sustainable economies. In this article, I am going to explain what complete capital is and how it can transform your business.
But before we enter complete capital, I am going to discuss some of the models, assumptions and premises that form our modern economy, and have a large influence on how we view capital.
So what are the assumptions behind these models? And how does it drive modern business decisions?
The Economic Machine and Your Business Model
Luckily, there are a number of practical implications. After all, knowledge is there to improve practice. One of these practical implications is to consider all forms of capital. In this insight, we’ll look at how we can view capital differently and design sustainable, future-proof yet profitable business models.
But before I explain this, we need to understand some of the assumptions that are behind how we usually understand capital.
The current economic focus is based on growth and runs like a cycle of expansion and recession. But what does that mean? Let’s explore two key terms that are important in the economic machine – and that may influence how you see your business.
Stimulating Growth: The Impacts of Quantitative Easing
To attain a certain level of economic growth, central banks aim for a certain level of inflation. But, at the time of writing this article, inflation is sky-high and within the range of double-digit percentages. There are various factors that can cause inflation, and one of the reasons that largely influenced inflation is called quantitative easing.
Quantitative easing is a posh word for saying that central banks, such as the European Central Bank, can print money and bring this money into circulation.
This excellent video of Ray Dalio explains beautifully how quantitative easing is one of the tools that is used to run the economic machine we’re all in. (This video is a must-watch for anyone with even the faintest interest in economics).
Next to lowering interests, printing money stimulates the economy. Money becomes more readily available, and governments and organisations can invest more, which in turn results in more jobs and money spent. That doesn’t sound too bad, right?
But if the heap of money is big, money becomes cheap, resulting in rising prices. Say hello to inflation! All because we want to economy to grow. And all because we can even create money. Usually, when inflation turns too high, the money print is stopped and interest rates are lowered. As you may expect because of the opposite direction, this may stop or even limit economic growth.
The Dangerous Premise of (Unlimited) Growth
And from quantitative easing, we end up with the premise of growth. Growth as the single metric and driver for defining an economy and a business is going well. The idea of GDP growth actually stems from an area when the (American) economy was in crisis between the two world-wards, and drastic measures and metrics for evaluating these were needed.
It was a good idea then, but do we still need to focus on this single, financial measure of growth? Not surprisingly, this way of thinking trickles down to business, great and small. A business is going well if profits grow substantially when shareholders are content. But should this be the only measure? Is focusing on financial measures only the best way to build your business?
Moreover, the economic idea of (unlimited) growth falsely assumes that all the resources that are needed for this growth are unlimited. But we all know we live on a finite planet, with finite resources and clear boundaries. And we’re clearly seeing the boundaries are eroding and we can’t continue in this way.
Shifting Your (Economic) Focus for Sustainability
We have seen the big perspective of how some economic factors influence how businesses and actually whole countries are run. It’s easy to ramble on about what is going on, so let’s see how we can shift focus towards a more sustainable, and future-proof perspective.
From Shareholder to Stakeholders
Shareholders can bring in much-needed investments to grow a business. However, shareholders can also largely influence business direction. In turn, that can result in a business that solely focuses on profits.
Outside of investing, shareholders often bring low practical value to the actual operations of a business. Strangely enough, they do benefit greatly when a business runs well. On the other hand, stakeholders – people who are somehow part of the operations of a business whether they are an employee or not often benefit less.
Moreover, the distribution of wealth among stakeholders is often skewed towards the stakeholders that are manufacturing, distributing or selling – at the end of the value chain. For example, coffee farmers just get 7% of the share for a single sachet of coffee (or 16% adjusted to purchasing power parity), while distribution and manufacturing get a whopping 84% of the share.
Stakeholders are often situated in the regions where a business is active. When stakeholders benefit from a business doing well, this impacts their regions as well. Especially when a business is sourcing from developed countries.
The solution is simple: instead of focusing on shareholders, focus on stakeholders and distribute the share in line with the value each stakeholder delivers.
From Financial Capital to Complete Capital
Big chance when you hear capital, you are thinking about any assets a company may own – or you even may just think about money. Instead of defining capital as just a financial measure, it should be defined in different forms of capital – a complete picture of capital:
- Human Capital
- Social Capital
- Natural Capital
- Financial Capital
- Circular Capital
We’ll highlight this in the next section of this article.
From Private/Public Value to Hybrid Value
Instead of seeing the private and public sectors as separate entities, consider them as hybrid entities that can share value if they want. (Also called the hybrid value system).
Businesses have a lot to gain from collaboration with governments, non-governmental organisations and communities and can also bring a lot of value to these parties, with mutual benefits.
From Disposal to Circularity
Every form of capital, from money to office inventories or construction materials can be considered for reuse or for disposal. In our office building, there is a whole section with unused chairs, tables and more – ready for disposal. An unfortunate example of wasted capital, often too common.
For any assets owned, consider their possibility of reuse – either internally or externally (also bringing in new business possibilities).
As CreativeSolvers, we were involved in the early stages of Insert, a marketplace for circular building materials – a perfect example of reusing resources.
From Wealth to Well-being
From a personal perspective, there is another factor that can play a huge role. While wealth is related to well-being, attaining wealth is not a guarantee for well-being. Strangely enough, many societies have a disposition that we need to attain wealth instead of well-being. Well-being is also explicitly defined as the output of ‘Human Capital’.
In my personal observation, greed – the desire to gain more money and possessions – is a strong foundation of the problems we encounter. Unfortunately, it makes our economies run rampant, damaging people and the planet along the way.
When focusing on well-being, we may find out that we already have more than enough wealth to “be well”. And being content with what we have may help tackle our hunger for growth, and move towards a more sustainable world.
The 5 Forms of Complete Capital
I’ve already touched upon capital in the previous section, so here we are. In my opinion, the focus should be shifted from just one form of capital (the financial form) to 5 different forms of capital.
In the phenomenal book ‘Completing Capitalism’, Bruno and Jay describe 4 different forms of capital that companies can use to attain more sustainable, friendly and yet profitable business.
In addition, I would suggest adding a fifth form of capital which focuses on the solid nature of capital: circular capital. Circular capital describes what amount of resources can be harvested, reused in any form and reinvested in the business or society.
Each of these capital has specific metrics that are advantageous to the success of each form. It is generally advised to focus on metrics that are accounting for at least 75% of the capital for each form. Multiple studies indicated that companies that focus on all these forms of capital benefit their surroundings, employees and context greatly, while also being profitable.
But what do these forms of capital mean in practice? Let’s explore them:
1. Human Capital
Human capital amounts to the experience, knowledge, skills, satisfaction, health and well-being of an individual affiliated with your business. The following factors largely influence well-being the most:
- Cultural fit: The fit of the personal values of an employee with the corporate culture
- Relational trust: the level of trust in relationships between employees
- Upward mobility: the possibility of progressing upwards and acceptance of wage differences
- Job recognition: the (symbolic) recognition and status that is attributed to a certain job
- Line manager effect: the effect of positive managers on their direct reports
2. Social Capital
Social capital is defined by all nonfinancial relations affiliated with a company. The following factors influence social capital:
- Social cohesion: the extent to which differences in identity (religion, ethnicity, gender), status and wealth create division
- Moral trust: the perceived trust in business transactions and expectations to behave morally.
- Collective action capacity: capability of an affiliated community to solve problems and work together
- Political stability: factors that amount to the stability of a country, such as low corruption, fair justice, social equity and peace.
- Necessity Accessibility: accessibility to energy, water, food, health, education and housing
3. Natural Capital
Natural capital describes the usage of natural resources. Natural capital is measured by five factors:
- Inorganic materials usage: the usage of non-living materials, such as metals and oil.
- Organic materials usage: the usage of growable materials and living organisms.
- Water and air usage: usage of water and air, such as absorbed oxygen usage, freshwater usage
- Natural erosion: factors that erode biological and natural resources, such as biodiversity loss, land conversion, soil erosion, and overfertilization
- Pollution: the amount of pollution, such as air pollution, ocean acidification, chemical pollution and CO2 exhausts.
4. Shared Financial Capital
Financial capital is the usual way how capital is defined, but it is redefined as shared financial capital here. Shared financial capital can be measured by the following metrics:
- Stakeholder Share Distribution: how all (financial) shares and benefits are equally distributed to all relevant stakeholders.
- Shared Value Index: an index similar to the Gini index to measure how equally shares are distributed.
5. Circular Capital
At last, circular capital describes to what degree a company is using its resources in a renewable way. Currently, I hypothesise the following factors are important for growing circular capital:
- Resource Circularity: the number of resources that can be reused, harvested or diverted to another usage.
- Operational Circularity: the number of organization processes that allow for the reuse of any capital resources.
- Cultural Circularity: the moral stance of the corporate culture on any usage of resources, such as energy, inventories and materials.
Capital is important because it is needed to run a company and drive value for all involved. Surprisingly, companies that focus on all forms of capital also do well financially. What forms of capital do you want to focus on?
Applying Complete Capital to Your Business
Now that we’ve considered all forms of capital, how do we make it concrete? Here are a few takeaways:
- Evaluate your business on the five forms of capital. How can these forms be implemented, and how can you transform operations to measure the most important criteria for these forms?
- Consider how you can design systems that evaluate the different forms of capital, and what people you need to have to implement the five forms of capital.
- Evaluate your current vision, corporate culture, brand and performance indicators. Can you move them to values that focus on well-being more?
- Evaluate the influence of shareholders and their importance against stakeholders.
- List all relevant stakeholders and the share they get. Is this rightly distributed?
- Look for opportunities where your organisation can collaborate with local communities, governments or non-governmental organisations.
So what do you think? Can we help redefine the economic machine we’re all part of?
This article, among others, was inspired by the theories found in Completing Capitalism, a book written by Bruno Roche and Jay Jakub. Doughnut Economics of Kate Rayworth also heavily influenced these writings. Illustrations are from Storyset.