Measuring and Managing Organizational Capital Series No. 1
Report | February 24, 2016
By Baruch Lev, Suresh Radhakrishnan and Peter C. Evans
Some companies systematically outperform their competitors and maintain their leadership positions for long periods of time despite persistent competition and a changing business landscape. Why? A new paper by the CGE points to the critical role of organizational capital. Organizational capital consists of intangible assets of the firm such as human capital, values and norms, knowledge and expertise as well as business processes and practices. Organizational capital provides the basis for inert resources such as plant, equipment and other physical assets to be efficient and productive.
The paper is part of The Center for Global Enterprise’s goal to help CEOs and business leaders better understand and advance best management practices related to organizational capital. At present, conventional accounting practices do not acknowledge the power and potential of organizational capital. Consequently, CEOs and other executives lack reliable measures of organizational capital to manage and drive performance.
As a CEO’s Guide to measuring and managing enterprise intangibles, the paper:
- Traces scholarly research on organizational capital
- Reviews measures of organizational capital that have been developed
- Summarizes the evidence on the relationship of organizational capital to performance and risk
- Provides a framework and recommendations for future research on organizational capital
The authors acknowledge that while it is difficult to develop a common set of measures that apply for all companies, based on the links that are established between specific business processes and practices and organizational capital, companies can choose to disclose to the public their efforts towards creating and sustaining organizational capital to enhance the operation of capital markets. The authors recommend that CEOs consider making voluntary organizational capital disclosures.
In a digital age, organizational capital is becoming increasingly more important for firms as well as the global economy. The analysis provided in this paper provides CEOs and their management teams approaches to more effectively measure and manage their organizational capital assets.
View the full report here.
What is Organizational Capital?
Organizational Capital has been defined as the “knowledge used to combine human skills and physical capital into systems for producing and delivering want-satisfying products.” Organizational capital consists of the processes, systems, and other assets that companies have aside from their financial reports.
Why this line of research?
Measuring Organizational Capital is known to be important in an enterprise, but unlike physical capital, its value does not appear on the balance sheet of a firm. When companies make substantial organizational changes it is typically treated as “consumption” rather than an increase in the assets of a firm. It is proven that organizational capital is essential to competitive advantage—enterprises with more and higher quality are likely to be more profitable and have higher market shares—yet businesses find it an intangible that is difficult to measure. This project will seek to develop firm specific measures of organizational capital. Measuring organizational capital will be useful in quantifying the benefit of a GIE architecture.
The Measuring Organizational Capital research project consists of a team of leading scholars and experts on organizational capital: Peter Evans (Project Director), Baruch Lev, and Suresh Radhakrishnan.