How to recognize the risks of social capital in supply chains

How to recognize the risks of social capital in supply chains

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South African gold mine, circa 1935.

“It’s not what you know, but who you know.” Phrases such as this suggest relationships long have been appreciated, and even vital to, successful business ventures and operations.

But a year after a gruelling platinum strike — the longest and most costly in South Africa’s history — it is doubtful that South African business has learned this lesson well enough.

The platinum strike that shut down roughly 40 percent of the world’s platinum supply and cost the South African economy a bewildering $2.1 billion is a textbook example of how eroding social capital can cause business breakdown.

In particular, at least two kinds of relationships deteriorated systematically in the lead-up to this unrest and the killing of 44 people in August 2012.

First, management’s relationship with workers, particularly the rock-drillers, had become less direct because of a reliance on intermediaries in the form of union representatives or contractors. As a result, middle and senior managers became increasingly isolated from the grievances and growing institutional distrust among these workers.

This also contributed to managers’ lack of knowledge of workers’ increasingly precarious financial situation, due in large part to their exposure to emolument orders. A social capital analysis might have indicated earlier on that there are “holes” in managers’ network relationships with workers and that these holes contributed to a lack of pertinent knowledge and necessary trust.

Second, managers arguably paid insufficient attention to the relationship between workers and the dominant union: the National Union of Mineworkers. As this relationship deteriorated, rivalry between the incumbent and a new contender created crucial challenges for management.

The challenges faced by mining companies with regard to conflicts between rival factions within communities, or between municipalities and traditional authorities, are examples of how critical third-party relationships are. A social capital analysis should focus attention on these third party relationships and ways in which the company could seek to support more conducive network dynamics.

Translating reports into action

The value of such relationships has been foregrounded in the integrated reporting movement.

South Africa is the first country in which listed companies are required to publish such an integrated report. The guidance provided by the International Integrated Reporting Council suggests that a company’s public report should include information about six forms of “capital” as inputs and outputs of the value generation process. One of these is social capital, which focuses on “institutions and relationships.”

However, despite this focus, it is remarkable how little explicit, structured attention is often given to assessing and improving relationships in business. There is still much uncertainty about what social capital actually means and why and how it should be measured.

A new report commissioned by the Network for Business Sustainability South Africa has gone some way towards addressing this uncertainty. Based on this review of 314 studies, the report defines social capital as the ability to secure or obtain resources, knowledge and information through relationships with and among individuals and groups.

These relationships can be among internal stakeholders of an organisation (as among employees) and between an organization and its external stakeholders (consumers and regulators). Social capital has three dimensions: the shape and structure of networks of relationships; the quality of these relationships in terms of trust and reciprocity; and shared norms and values.

Firms derive value from both internal and external social capital. Relationships among internal stakeholders give rise to enhanced efficiency and reliability in managing operations, projects, and innovation. This is because of improved sharing and dissemination of information and knowledge, and enhanced commitment and retention of employees.

Building external social capital contributes to competitive advantage and cost reductions, because it enhances access to firm-external information and knowledge, and it builds the firm’s reputation among key stakeholders such as customers, regulators and prospective employees. Firms also benefit from the positive impacts of social capital on social development and a conducive business environment, for instance in local communities surrounding a firm’s operations.

The intangible nature of a firm’s social capital makes it a powerful strategic asset, but it also makes it a difficult thing to measure. Yet such measurement can enhance proactive efforts to grow this asset, and it is also necessary to respond effectively to integrated reporting guidelines.

Each of the three dimensions of social capital is associated with particular measures. Hence, for instance, we may measure the size, diversity and density of individuals’ or organizations’ networks, and we can identify possible “holes” in the shape of such networks.

Different forms of trust can be assessed, including interpersonal trust among people who know each other, such as employees working in particular teams or departments. This trust is particularly salient for the effectiveness of operations, as well as organizational change or innovation initiatives. Institutional trust, meanwhile, relates to individuals’ trust of authority structures, including employees’ perceptions of management.

Trust obviously also plays a role in firms’ interactions with external stakeholders, and companies are beginning to apply more systematic means for assessing and improving trust.

For example, Transnet recently has conducted a successful pilot study investigating the quality of relationships between key managers and customers or regulators. Over and above providing a useful diagnostic, it also has provided a platform for fruitful conversations to improve these relationships.

Of course, managers’ efforts to measure and report on social capital will not necessarily avoid problems such as those plaguing the platinum mines, but they may provide managers and other stakeholders with vital warning signs, as well as incentives and tools to proactively shape mutually beneficial relationships.

The cost of not doing so is high. As Implats executive Johan Theron remarked in the wake of the strike: "This strike has been enormously damaging. It has destroyed the relationships we have with employees, communities, the union and government. It will take years to restore. It has resulted in us taking an untold financial impact. The money and resources we had to finish our projects are gone … and it could substantially influence the shape of the future business.”

This article originally was published by Business Day.