Managing the Five Capitals for Sustainable Wealth Creation!

Overview

A contemporary enterprise is an innovative business vehicle focussed upon creating sustainable wealth and at the same time being a great corporate citizenship, a focus upon profit-people-planet. A business with goals in all three areas of profit, people and plant is more complex. It follows that the governance and leadership most also be more sophisticated. Around 1760 the industrial revolution and industrial economy started in Europe and spread across the world. The focus in the seventeen and eighteenth centuries was upon managing physical and financial capital for internal efficiency often with an internal win and external loose outlook. Only in the 1970’s the knowledge economy started with widespread computing and communications technology. The focus is on managing human capital. Now we are in the twenty first century and stakeholders are aware of managing aspects across profit-people-planet.

Enhanced governance and management styles and capabilities are required.

Rules, Regulations, Law & Governance

Corporate governance creates wealth by setting a clear mission, vision, goal and strategy. The business operations may actually be simple yet setting goals across profit-people-planet makes the governance more complex and the operational leadership more challenging. Very simply the governance and leadership capability and style of the industrial economy or even the knowledge economy are unlikely to suit.

Dr Stephen B. Young of the Caux Round Table suggests that there are five types of capital to manage: physical, financial, human, social, and reputational capital. This is based upon far reaching research on best business practices and ethics across USA, Europe, Austral-Asia and Japan. Therefore we have a hint that industrial economy and even knowledge economy management styles and capabilities are insufficient to manage all five core capitals, specifically social capital and reputational capital.

The Caux Round Table proposes that key governing principles for sustainable wealth creation must include the following two aspects: Living and working together for the common good, mutual prosperity, with healthy and fair competition; and Valuing human dignity and the sacredness of each person, be they employees, customers or stakeholders.

Although law, regulation and commercial market forces can go a long way towards ensuring these principles are adhered to, it is really determined by the mission, vision and values and conduct set by the Board of Directors. External forces can drive compliance. It is an internal Board choice, that determines the tone, spirit and behaviour.

Leadership Styles

Recently, Dr Deepak Chopra has been leading workshops on the Soul of Leadership, awakening us to the possibility that there are seven different types of leadership each more appropriate in different times and situations. In our new economy, where we must value all five types of capital, we require different leadership style then the aggressive and arrogant win-lose styles of the last 50 years.

Dr Jane Houston, is a guru on human potential and has been working with the United Nations to develop new leaders for our modern time. Her own mentor was Margaret Mead. She calls this contemporary style of leadership, social artistry. Social artistry is about ancient wisdom.

Modern management seems to believe that there is nothing to learn from our ancient forefathers and fore mothers. Modern business and especially social enterprise shows that we can learn a great deal from our ancient lineage. A group focused upon developing human potential is the Society of Jesus, known as The Jesuits. They have over the centuries contributed to personal development and contribution to society, far larger than their small numbers.

Influence of Development of Corporate Entities

Lets also, look at the history of commerce. The first corporation limited by shares was the Dutch East India Company in 1602. Prior to that time the only expansive commercial vehicle was partnership law. The earliest body of limited liability partnership law suitable for trade is the Qirad in Islam. It is likely that the Qirad originated in the Arabian Peninsula with the Arabian caravan trade. It later became one of the most widespread tools of commercial activity. It was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making profit. Both parties then received a previously settled portion of the profit, though the agent was not liable for any losses. From AD650 to AD1250, the Golden era of Islam the commercial world was largely driven by such trade partnerships, one of the key reasons why Islam spread across the world.

Partnership law was adopted in Italy in tenth century. Even today most accountants and lawyers use the partnership vehicle for business. This vehicle has also been updated in recent years to offer limited liability partnership business vehicles. The partnership vehicle is alive. The partnership has as owners the leaders and operational managers and expectant staff that one day they too may become partners. The partnership often has a paternalistic approach. Hence, just looking at 200 hundred years of industrial age contemporary management thinking ignores 1500 hundred years of ancient commercial wisdom.

Concluding Words

We have a wealth of management knowledge on managing human capital, physical capital and financial capital. Social enterprise leadership

will therefore also need to draw upon more wisdom about managing social capital and reputational capital, which intrinsically is about people and the planet. The old administrations and government agencies based upon managing less than all five are like the dinosaurs under pressure of extinction.

Social enterprise and the governance and leadership of the five types of capital is one of the transformational trends of this period of time and key to governance of profit-people-planet.

Paul A Zaman is the CEO of Qualvin Advisory, we provide “smart support for busy executives” to listed and unlisted companies in creating sustainable wealth and being good corporate citizens, getting a firm and fair share price and institutional investor engagement.