Winning Investors Over: Surprising Truths About Honesty, Earnings Guidance, and Other Ways to Boost Your Stock Price by Baruch Lev

Author:Baruch Lev
Language: eng
Format: mobi
ISBN: 9781422115022
Publisher: Harvard Business Review Press
Published: 2011-10-24T14:00:00+00:00

Social Capital: The Devil They Know

We often forgive or give the benefit of the doubt to relatives, close friends, and trusted colleagues, even for committing serious offenses. For the offender, this forgiveness or benefit of the doubt is the return on investment in social capital. The social capital built by CSR includes the networks and relationships with local governments, NGOs, and charities, as well as the norms and codes of conduct established with industry peers, regulators, and organizations, such as the UN (the Kimberley Process, a certification procedure to prevent trade in blood diamonds, for example), and the trust built among members of the CSR network. That social capital and trust enable companies, it is often argued, to mitigate the consequences of social and environmental mishaps. Sounds good, but how exactly does it work?

Trust among network members—the essence of social capital—is, surprisingly, at the core of most business activities. The Nobel Laureate economist Kenneth Arrow, known for his rigorous, formal (namely, mathematical) approach to economics, ventured into the marshy field of trust and cooperative behavior, concluding: “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time.”35 Thus, when you buy a car with a five-year warranty, you trust the manufacturer to be there when problems arise and abide by the warranty terms; or, when you pay a premium price for organic food, you trust the retailer that the items you bought were indeed organically grown. These and many other transactions will obviously not take place, or have their terms radically changed, without the trust between the parties to the deal. Arrow went further, conjecturing that much of the economic backwardness worldwide can be attributed to the lack of mutual confidence. The low participation of individuals in the stock markets of many developing countries, believing that stock prices are rigged and that minority shareholders are often exploited, is an example of economic backwardness due to lack of trust.

How is business trust created and maintained? You guessed it—by developing social capital. People in high social-capital communities act together more effectively because they trust each other due to the ability of the community (network) to punish deviants effectively or as a result of moral attitudes imprinted by education, such as the virtues of charitable contributions.36 Thus, social capital enhances personal trust, which in turn increases economic efficiency and development, mostly by avoiding costly legal mechanisms and cumbersome contracts.37 Indeed, researchers document that social capital in Italy plays an important role in the degree of financial development across different regions of the country (increasing the likelihood of people using checks, investing in stocks, and increasing the level of bank deposits, all enhancing economic development).38 Using the World Values Survey for measuring cross-country trust, Stephen Knack and Philip Keefer show that trust and civic cooperation (social capital) are positively associated with stronger national economic performance.39

That’s the raison d’être of CSR initiatives as insurance against the repercussions of social or environmental mishaps. The social capital created

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