Articles

MONTHLY FEATURE

December 2001

New Directions for CSR: Can CSR enhance a companies' intellectual capital?

By

Michael Hopkins

Corporate Social Responsibility (CSR) is considered to enhance a companies' reputation, for sale but what about other intangible assets such as intellectual capital? MHCi's view is that policies to promote CSR in a company also improve its intellectual capital (IC). More on this below but first, ailment what is intellectual capital? An example - why would Microsoftís value as a company reduce to, say, 5% if it lost 50% of its employees while the value of, say, General Motors would lose, maybe, 10% of its value if it lost half its employees (chosen at random). The reason is that the value of Microsoft is firmly rooted in the intellectual capital of its employees while this is less so the case of GM.

Intellectual capital is the use and management of knowledge to create shareholder value and company growth. Business has realized that the wealth of their company is increasingly being generated by the intellectual capital in the company and not the physical. Essentially, the physical capital of a company is what is left when the lights go out at the end of the day whereas the intellectual capital is what makes that capital produce business, profits and growth ñ this has also been referred to as the 'intangible assets' of a company.

It has been argued, although not empirically justified, that knowledge assets are governed by a law of 'increasing returns'[1]. In contrast to the traditional factors of production that are governed by traditional returns, every additional unit of knowledge used effectively results in a marginal increase in performance.

Social capital is also closely akin to intellectual capital. The OECD[2] defines social capital as "a combination of networks together with shared norms, values and understandings that facilitate co-operation within or among groups".

The intellectual capital literature[3] divides the concept of intellectual capital into four: Human Capital, Organisational Capital, Market Capital, and Innovation Capital where,

Human Capital comprises all the skills, expertise and competencies of the company to react on market demands and customer needs including leadership and management issues and capabilities.

Organisational Capital comprises the capabilities of a company, its infrastructure and organisational processes to produce products and services to the market.

Market Capital represents the capabilities of a company to interact with the external interface like the customer, partners, and suppliers and other stakeholders.

and

Innovation Capital refers to a company´s ability to innovate, improve and develop unutilised potential as well as generate long-term wealth.

The literature on intellectual capital is vast ñ for a more in-depth report This e-mail address is being protected from spambots. You need JavaScript enabled to view it. since we have just finished a major report on this for UNDP. But what is the link with CSR? CSR is a company strategy that helps in setting the values of a company and in treating the company's stakeholders in a socially responsible manner (see glossary for more on definitions). A company has both internal and external stakeholders. How does CSR help to develop intellectual capital for each stakeholder?

First, for the internal stakeholders such as board members, managers, and employees CSR encourages increased involvement in the review and application of a companies' values. This, in turn, requires, improvement in the companies human capital through on-going training and also how this increased human capital is used i.e. how intellectual capital is both created and used to promote the companies' existing business and to think and create new areas of business. Thus increased internal stakeholder involvement is a key plank in both CSR and intellectual capital development.

Second, for the key stakeholder the consumer, raising the awareness of consumers through carefully crafted CSR programmes about a companies brand and reputation also increases, but more subtly than for internal stakeholders. This process is concomitant with raising the intellectual capital of consumers about the companies' products and services. Obviously this is more important for complicated products such as computers, video machines, electric motors etc. than hairbrushes or apples.

Third, a companies' suppliers require continual contact with their client but this will vary in terms of their importance. For instance, a supplier such as Rockwell that provides technological solutions to manufacturing processes will require a much closer relationship with a client than a supplier of, say, nuts and bolts. This close relationship requires that both the client and the supplier will require the development of intellectual capital about the processes involved i.e. the CSR of both client and supplier will be enhanced.

Fourth, other external stakeholders such as the government, the environment, the local community will have varying needs of intellectual capital development about the particular company depending on the specific activities of the company itself. Just to remind readers that not only must the human capital about the company of its external stakeholders need to be increased but, more importantly, it is the use of this information. Positive use of such information can help both the stakeholder and the company.

What is the process for increasing the intellectual capital of a company as part of a CSR strategy? One of the leading thinkers in this area, Nick Bontis remarks[4] that intellectual capital is a concept that is extremely flexible but it is complicated for anybody to make sense out of the very different contributions, all suggesting slightly different variations of the same idea. The same group also note that the choice of IC indicators should be guided by the long-term strategy of the company, its vision or mission. Once the company has clear ideas on its identity and its long-term goal, it should use these goals to identify two sets of variables: one is the ìvalue creating pathî, that is the categories, or focus areas, of IC that really drive value creation; the other is the set of key success factors (KSF) and indicators that are appropriate as performance measurements. Such a process is very similar to the process recommended for companies to develop a social report. In conclusion, developing CSR in a company will also develop its intellectual capital.


 

 


References to this feature:

[1] Yogesh Malhotra: "Knowledge Assets in the Global Economy: Assessment of National Intellectual Capital", Journal of Global Information Management, July-Sept 2000, p5-15

[2] OECD The well-being of nations: the role of human capital in supporting economic and social development, Paris, 2001

[3] See, for instance, Leif Edvinsson and Michael S. Malone: Intellectual Capital, HarperBusiness, London, 1997, p 35

[4] Nick Bontis, Michael G. DeGroote, Kristine Jacobsen, Göran Roos: "The Knowledge Toolbox: A Review of the Tools Available To Measure and Manage Intangible Resources", 1999, European Management Journal, Vol. 17, No. 4, 391-402.