Our economies continue to change at an incredible rate. The industrial era is being pushed aside none too soon. Our societies and our planet cannot afford business models that maximize short-term profits at the expense of communities, the environment and even the long-term interest of the companies themselves. The good news is that information technology provides us the tools to re-make businesses to drive innovation and solve problems in new and more effective ways. Success today demands holistic management of tangible, natural and intangible digital and knowledge assets.
All these changes demand new forms of understanding and measuring corporate operations. A key aspect of this is the multi-capital model. The basic concept is that companies use many kinds of tangible, intangible and natural resources to create value over time. They need these resources and must therefore pay attention to their sustainability.
What are these resources and just how many are they?
The Integrated Reporting movement is calling attention to the multi-capital model in the U.S. and around the globe. The IIRC has a great background paper on the capitals. There’s even been a book written about Six Capitals. But the idea of a multi-capital model isn’t completely new.
Accounting has always identified multiple forms of owned capitals (financial, tangible and a small number of intangible assets). The intellectual capital movement has identified three forms of capital (human, relationship and organizational). And the ESG world has its three forms of capital (environmental, social and governance). The challenge for us all now is to combine these three perspectives in a meaninful way.
My journey to an integrated perspective started with the accounting/financial perspective then the intellectual capital perspective. The integrated reporting movement helped me see that I was like the blind men and needed to add natural capital to the models that I was using. But, as this diagram shows, there’s one form of capital in the other two models that’s not in the integrated model:
I call this missing element Strategic Capital. It’s also part of the ESG framework. To be fair, it’s in the IIRC model in this business model box as the mechanism by which the capitals are put to work:
What this doesn’t show is that the business model functions are themselves long-lived assets that a company needs to manage, preserve and build over time. It also ignores culture (which is a whole other discussion).
I came to this thinking through work I did with a great company (now dissolved) called Intellectual Capital Sweden started by Leif Edvinsonn and Peder Hoffman Bang. Their model included the three IC capitals (human, relational and structural organization capitals) plus something called Business Recipe. The idea was that you couldn’t measure the performance, outlook and risk of the other capitals without also measuring the performance, outlook and risk of the Business Recipe which created the operating logic: how the capitals fit together and how they combined to create value.
As I have applied the multi-capital model in my own work, I found that it was hard to map a company’s value creation system without addressing the value proposition, business model and culture that gave all the capitals meaning. I ended up elevating Business Recipe as Strategic Capital. It just helped the model hold together. With it on the page, you could tell the full value creation story of a business:
This worksheet is meant to be filled out as a custom inventory. It lays out value creation in a quick, easy format. This kind of analysis is incomplete without the Purpose column.
Think, for example, of Google and Amazon. If you want to map their value creation capitals, you’ll see a lot of similarities: lots of money (financial), cool buildings (manufactured), smart people with similar skills (human), similar customers (relationship), similar resource needs (natural) but different products and digital assets (structural). Is the difference in their products all that differentiates them? Isn’t there a role for value proposition, business model, purpose and culture in explaining how they create value? Put another way, isn’t it just as important that a company steward its strategic capital as it is to steward the other six?
To be honest, I share the view of the IIRC in the Framework:
Role of the capitals in the Framework
2.17 This Framework does not require an integrated report to adopt the categories identified above or to be structured along the lines of the capitals. Rather, the primary reasons for including the capitals in this Framework are to serve:
• As part of the theoretical underpinning for the concept of value creation (see Section 2B)
• As a guideline for ensuring organizations consider all the forms of capital they use or affect.
In the end, each company has to decide if/how to apply the concept of the capitals (and how many you use). All I can do is share that I find Strategic Capital to be an indispensable part of the mapping of a company’s value creation system.
The value creation table shown above is available as a free worksheet download. Give it a try and see whether the multi-capital model helps you explain how your company creates value over time!