Ethical capital is your company’s most valuable asset.

A fundamental premise of business is that it values its assets and capital. Financial capital represents the most obvious element of an organisation’s asset base, and, in a traditional business model, tangible assets such as plant and machinery contribute to the organisation’s financial capital. Mechanisation for instance, increased production in many industries, which boosted financial results. But what about ethical capital and intangible assets?

The rise of the knowledge economy and the accompanying shift in emphasis from financial capital to people as a primary source of competitive advantage brought into effect and gave priority to a new class of organisational assets, namely intangible assets. These assets include the following:

  • Employees’ knowledge capital, which encompasses their knowledge, skills, experience, creativity and innovation;
  • Employees’ relationship capital, which encompasses their relationships with team-mates, colleagues, associates, suppliers and customers;
  • Organisational capital, which is vested in the organisation’s values, leadership, culture, structure and systems;
  • Customer capital and supplier capital, which represent the value of an organisation’s on-going relationships with these stakeholders;
  • Community capital, which represents the value of an organisation’s relationships with external stakeholders (other than customers and suppliers) on whom the organisation’s operations have an impact. This includes the residents local to the company’s operations who may be affected by a range of positive or negative factors, such as better work opportunities, emissions or increased traffic. Community capital is not always acknowledged amongst the sources of intangible assets, but it warrants being included not least in recognition of the company’s social responsibilities.

Although intangible assets, by their nature, are often not visible and can be difficult to quantify, it should not diminish their value. To illustrate its effect, a rude or inefficient employee can undermine supplier or customer capital and non-delivery on commitments to the local community can erode community capital. The reverse is also true. Organisations can become more successful through having fair systems, helpful and respectful relationships and committed employees who willingly share their knowledge and skills. Thus as tangible assets can increase or erode the company’s financial capital, so too can intangible assets.

But what about ethics?

Ethics is often not recognised as an intangible asset, except perhaps as a facet of organisational capital. But it should be: ethics is an important intangible asset in the form of ethical capital. Ethical capital stems from and is created by ethical behaviour exercised both within the organisation amongst its employees and relative to its external stakeholders. The value that is generated by an ethical organisational culture also amounts to ethical capital.

The particular importance of ethical capital rests on the fact that ethics also serves to enhance other sources of intangible assets, for example, by improving the quality of the relationship capital the organisation enjoys with its people and its external stakeholders. This is evidenced by the fact that all stakeholders - whether employees, investors, customers or unions - would place greater value on relationships that are characterised by ethical values such as honesty, fairness and respect than on less trustworthy associations. Thus in contributing to the value of an organisation’s intangible assets, ethics contributes, in turn, to its financial capital.

High levels of ethical capital also earn the organisation other beneficial outcomes, amongst many others, the ability to attract and retain top staff and board members, increased customer loyalty, improved risk management, enhanced brand equity and, crucially, a sound reputation and higher levels of trust.

As regards the business imperative of competitive advantage, many sources of competitive advantage offer only a limited window of competitive opportunity. Technology advances, for example, are vulnerable to the ease and speed with which they can be copied and the rate at which they become outdated. A unique source of competitive advantage, which cannot be easily copied, is therefore infinitely more valuable. Which raises the obvious question: what is a unique source of competitive advantage? Workplace ethics offers just such a source. It cannot be owned, bought, sold, delegated or traded and it is not easy to copy. Instead it must be lived every day.

Collectively these benefits make ethical capital a company’s most valuable asset.

Yet, despite the obvious merit, ethical capital is not widely acknowledged as a source of value. This can be addressed by making ethics visible and by quantifying the company’s ethics (which also overcome the inherent challenges of intangible assets that they are often invisible and difficult to measure). Making ethics visible is essential to ensure that it constitutes a real part of the organisation and it should be a stated goal of the company’s ethics programme. Ethics should, for example, be part of the company’s induction and training, on the agenda at management and strategy meetings and a performance indicator for performance evaluations. Measuring ethics via a tool such as the Ethics Monitor, a web-based ethics survey, identifies the value of the organisation’s ethics, while also providing information and insight to manage ethics more effectively and to report on ethics accurately (in line with the recommendations of King III and the requirements of the Companies Act).

There is therefore a strong argument for the value of ethics as a major contributor to an organisation’s assets. It remains only to be recognised and acted on.

By Cynthia Schoeman
Published in HR Future, April 2014