What is Social Capital?

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Much of your company's value can be quantified by an inventory count and a balance sheet, but not all of it. Some of its value comes from less tangible things like its reputation in the community, often mentioned as "goodwill" when a business is offered for sale. Social capital is one of those intangibles that can play a role in your company's success. Think of it as the total value of your relationships, both inside and outside of your company.

What Is Social Capital?

Suppose for a moment you're choosing to make a significant purchase for your company. The two potential suppliers are equally reputable, and there's not much difference in price. One of those suppliers is a stranger to you, but the other is someone you've known well for a long time and enjoyed a good relationship with. Chances are you'll opt to make the purchase from the supplier you know, because of that existing relationship. That relationship is one example of social capital. If you have successfully built relationships with your peers in the business world, have a good reputation within your community and enjoy a high level of trust with your employees, those represent social capital as well.

Why Social Capital Matters for Business

Every business, at bottom, stands or falls on its human-to-human interactions. Whether they're between your employees, between you and your customers or between you and your peers in the business world, those interactions go a long way toward determining success or failure. That's where social capital shows its importance. Its impact is too broad to summarize neatly, but a few specific examples show its reach:

  • Your Company's Culture: Creating a culture of trust and shared goals within your company is a powerful form of social capital. Without trying very hard, you can probably think of several companies whose employees live and breathe the company's message – Southwest Airlines immediately springs to mind – and that's a powerful form of social capital.
  • Recruiting: Hiring and keeping the best candidates for your company often comes down to social capital. If you enjoy a reputation with local universities for providing excellent internships or if your personal network includes peers who make high-value contacts for you, that counts heavily in your favor. Employees who actively recruit friends or former classmates, and who post positive reviews on sites such as Glassdoor, will smooth your path as well. 
  • Mentorship: Running a business is always a challenge, and having an experienced mentor to help you see things clearly is a significant advantage. Meeting and cultivating potential mentors is one of the most important ways you can build social capital. Not only can mentors offer useful advice, their own networks of connections help you raise your business to new levels. Those connections, in fact, are often touted as a side benefit of attracting venture capital. 
  • Customer Evangelism: One of the most direct ways social capital can impact your bottom line is through customers who love your product or service and are willing to tell others about it. You can capture this through a strong social media presence or through direct endorsements if you're in the business-to-business market, but it's important to remember to create that positive impression before you try to exploit it. The rise of the Instant Pot, an electric pressure cooker with an intensely loyal user base, shows what's possible when customers really, really love what you do. 

The Bigger Picture

Some companies and academics define social capital as a commitment to improving the larger community and society outside of your business. They choose to do that by going beyond established labor or environmental standards or by taking on the cost of providing much-needed services or facilities, such as a vocational training program or a homeless shelter that local authorities can't budget for. These won't necessarily provide a direct and immediate benefit to your company, but it shows you're serious about supporting your community and increases the likelihood that your community will, in turn, support you.

References

About the Author

Fred Decker learned business fundamentals at second hand as an insurance and mutual funds broker, and at firsthand as a retail store manager and the chef/proprietor of his own restaurants. He has written hundreds of business-related articles for sites including Zacks.com, Chron.com, Vitamix.com, Bizfluent and GoBankingRates and many others. He was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.