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Minimizing the Impact of Organizational Distress on

Intellectual and Social Capital Through Development of
Collaborative Capital
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Title: Minimizing the Impact of Organizational Distress on Intellectual and Social Capital Through
Development of Collaborative Capital
Author(s): Michael F. Kenned! Michael M. "eerlein
Volume: ## Editor(s): Michael M. "eerlein! Susan T. "eerlein! Frances $. Kenned ISBN: %&'()(
&*+,#(+++(# eISBN: %&'(#('-%.)(,.#('
Citation: Michael F. Kenned! Michael M. "eerlein /+)).0! Minimizing the Impact of Organizational
Distress on Intellectual and Social Capital Through Development of Collaborative Capital! in
Michael M. "eerlein! Susan T. "eerlein! Frances $. Kenned /ed.0 Collaborative Capital:
Creating Intangible Value (Advances in Interdisciplinary Studies of Work Teams, Volume !!
1merald 2roup 3ublishing 4imited! pp.+,&(+'-
DOI: #).#)#*5S#.&+()%&&/).0##))%(& /3ermanent 6740
Pulisher: 1merald 2roup 3ublishing 4imited
Article
t!"e:
Chapter Item
Astract: Intellectual capital /IC0 and social capital /SC0! as forms of intangible value in organizations!
are crucial assets in toda8s volatile business environment. 1fforts to retain and develop these
intangibles are becoming more deliberate and disciplined. 9o:ever! organizations fail to
recognize the relationship bet:een organizational distress and the loss and5or reduction of
intangible value. The loss of intangible value ma potentiall impact an organization :ith
e;ual or greater damage than the loss of more tangible value. IC and SC generate man
outcomes beneficial to the individual and the organization. These benefits are reduced :hen
stress of emploees becomes e<cessive and damaging. The relationship bet:een the health of
an organization and the degree of impact of distress serves as a lingering threat to
organizational financial resources. Managers must build upon the gro:ing =no:ledge from
research and practice to help organizations account for the costs of organizational distress!
translate the importance of intangible value into tangible terms! and garner support for
developing IC and SC to obtain business ob>ectives. Deliberate and disciplined effort to build
collaborative capital can facilitate the gro:th of IC and SC :hich minimize the damage of
organizational distress.
ssues Open Government
Social Impact Bonds: Networking for Success
Building Networks Is Essential to Investment in Social
Impact Bonds
SOURCE: Flickr/artist in doing nothing
As conversations about social impact bonds continue it is help!ul to
understand "hat drives potential collaboration among investors#
By Kristina Costa and Laura Tomasko | March 3, 20!
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S(ARE:

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Social impact bonds+sometimes kno"n in the United States as ,$a* !or
Success- agreements+are as comple. as the* are innovative# Social impact
bond agreements re/uire cooperation bet"een government agencies social
service providers impact investors and e.ternal organi0ations+sometimes
called intermediaries# Aligning the interests o! so man* disparate actors is no
eas* task but part o! the appeal o! social impact bonds lies in the bene1ts o!
getting di2erent sectors to cooperate and "ork together to achieve
bene1cial social outcomes#
What are social impact bonds?
Social impact bonds or S%3s are an innovative ne" 1nancing mechanism !or
social programs in "hich government agencies pa* !or programs that achieve
speci1c social outcomes+but onl* a!ter those outcomes have been achieved
and veri1ed# &ongovernmental investors pa* the up!ront costs o! the programs
in e.change !or a return on their investment i! the programs are
success!ul# Under these arrangements a government agenc* de1nes an
outcome it "ants to see achieved relative to a speci1ed population over a set
period o! time+!or instance a reduction in the rate o! recidivism b* 45 percent
over 1ve *ears among nonviolent o2enders in a prison s*stem# 'he
government agenc* contracts "ith an e.ternal organi0ation that pledges to
achieve the speci1ed outcome or outcomes and promises to pa* an agreed6
upon sum i! the organi0ation is success!ul# 'he e.ternal organi0ation then raises
mone* !rom sociall* minded investors to !und social service providers# %! the
outcome is achieved the government agenc* pa*s the e.ternal organi0ation
and the investors receive a return on their principal# (o"ever i! the outcome is
not achieved the government pa*s nothing#
S%3s 1rst took root in 7545 in the United 8ingdom "here the* are currentl*
being used to 1nance interventions to reduce recidivism and homelessness
among other issues# %n the United States e.perimentation "ith social impact
bonds has begun# &e" 9ork Cit* and :assachusetts have used them to attempt
to reduce recidivism among ;uvenile o2enders and Utah has announced it "ill
use them to e.pand access to earl* childhood education# 'he state o! &e" 9ork
has launched a social impact bond to reduce recidivism but it is also looking to
improve "ork!orce outcomes !or adult o2enders#
Collaboration "hen done "ell allo"s organi0ations to pool resources and
e.pertise thereb* achieving more together than an* one institution could
achieve on its o"n# 3e!ore contracts are signed and "ork begins
organi0ations must come together to e.plore "hat it might look like to "ork
together# :an* !actors determine "hether a program "ill succeed or !ail
particularl* "hen it involves aligning di2erent t*pes o! organi0ations each
"ith its o"n accountabilit* structure 1nancial and human6capital resources
and institutional goals#
As interest in social impact bonds continues to accelerate across the United
States and around the "orld man* institutions are considering "hether and
ho" to take advantage o! this ne" innovation in social 1nance# <imited data
on the e2ect o! social impact bonds e.ist since the 1rst pro;ects that made
use o! S%3s are still under"a*# For e.ample the 1rst such agreement in the
"orld launched in the United 8ingdom in 7545= this pro;ect to reduce
recidivism among nonviolent o2enders at (: $rison $eterborough is not *et
complete#
Furthermore social impact bonds also carr* considerable risks especiall* !or
investors# Even !oundations "ith long histories o! assessing social impact
!ace challenges in assessing a given social impact bond deal# $otential
investors are still developing important /uestions:
(o" can an investor appl* due diligence to an unproven 1nancial instrument
!unding social interventions as such instruments are o!ten di>cult to scale or
replicate even in the most capable hands?
@ithout ade/uate grounding in evaluation methodolog* ho" can an investor
;udge the evidence base o! a program itAs being asked to 1nance?
(o" can an investor be certain that government "ill !ollo" through "ith its
support o! a success!ul social impact bond especiall* i! the term o! the deal
straddles an election *ear?
'o date the investment si0e o! most social impact bonds has been relativel*
small+less than B75 million# 'he 1rst in the United States in &e" 9ork Cit*
"as 1nanced "ith BC#D million !rom Eoldman Sachs# 3ut as social impact
bonds become larger and more comple. man* deals "ill rel* on multiple
investors !rom di2erent t*pes o! 1nancial institutions# @e are alread* seeing
this trend un!old evidenced b* the Fanuar* announcement o! a S%3 !or
;uvenile ;ustice in :assachusetts# 'hat deal blends private philanthropic and
grant dollars to pa* the up!ront costs o! the interventions#
Building relationships to build communities
Recogni0ing that relationship building "ill pla* a critical role in collaborative
investment in social impact bonds the Center !or American $rogress and the
Council on Foundations ;ointl* organi0ed t"o discussions to bring together
di2erent t*pes o! potential S%3 investors: !oundations= Communit*
)evelopment Financial %nstitutions or C)F%s= and investment 1rms !ocused
on social impact including "ealth management advisors and the communit*
development divisions o! large investment banks# All discussion participants
"orked at institutions !ocused on delivering both social impact and 1nancial
returns#
'he goal o! the meetings "as to spark discussion about "hat incentivi0es
each investor t*pe to consider participation in a social impact bond# 'he
discussions centered on t"o themes: the importance o! bridging the
perception gap bet"een di2erent investor t*pes and the role that
government and public polic* can pla* in !acilitating investment in
social impact bonds# 'his issue brie! !ocuses on the !ormer# 'he latter is
covered in a separate CA$ issue brie! ,%nvesting !or Success: $olic*
Guestions Raised b* Social %nvestors#-
'he 1ndings outlined in this brie! are !rom the t"o meetings noted above and
!rom a series o! one6on6one phone conversations "ith most meeting
participants in advance o! the events# )uring the phone calls each
participant "as asked to consider his or her investor group+!oundations
C)F%s and social impact investment 1rms+and share "hat that speci1c t*pe
o! investor "ould "ant the other organi0ations to kno" about it prior to
beginning a conversation about collaboration# 'hese phone conversations
helped prime participants to think about some o! the stereot*pes and
misconceptions that can impede collaboration# :oreover the* allo"ed CA$
and the Council on Foundations to better understand ho" C)F%s !oundations
and social impact investment 1rms operate#
'he t"o meetings provided participants "ith the opportunit* to hear
reactions o! other potential social impact bond investors and share their o"n#
Each meeting included about 75 participants including !our to 1ve
representatives each !rom the three t*pes o! investment organi0ations and a
small number o! representatives !rom intermediar* organi0ations and
government# Sonal Shah !ormer director o! the @hite (ouse O>ce o! Social
%nnovation and Civic $articipation "as the !acilitator at both gatherings#
'he meetings "ere structured around t"o case studies "ritten b*
independent consultant Steven Eoldberg "hich outlined h*pothetical S%3
investment opportunities# %n dra!ting the cases "e made deliberate choices
to elicit conversation on issues such as risk time hori0on intervention scale
and evidence level# @hen discussing the 1ctitious cases participants "ere
encouraged to make comments that reHected ho" an abstract !oundation a
C)F% and a social impact investment 1rm+rather than their
particular organi0ations+might react i! presented "ith an investment
opportunit* like those outlined in the case studies# 'his approach aimed to
prevent participants !rom !eeling pressured to speak on behal! o! their
organi0ations#
Eoing into these discussions "e considered the variet* o! roles that each
interested investor could pla* in a social impact bond# Foundations
!or e.ample could opt to convene other organi0ations or provide content
e.pertise= provide grant support to scale a promising program or !und an
evaluation= o2er guarantees !or some portion o! other investorsA capital= or
invest directl* "ith returns on investment ranging !rom 5 percent to
market rates or be*ond# C)F%s could pla* an intermediar* role as
aggregators and distributors o! capital or as capacit* builders !or service
providers#
The case studies
Investment case studies
Using social impact bonds to prevent child abuse and neglect
'he scenario: @e proposed a B75 million social impact bond to prevent the
children o! 7I55 !amilies !rom entering !oster care over a period o! 1ve *ears
"ith a proposed intervention that "as termed ,promising- but had not *et been
determined to be a ,gold6standard- or a ,top6tier- evidence6based intervention#
%n this situation the cost o! !oster care !or the state in 7544 "as B444 million
and resulted in 7J55 placements# %t is estimated that reducing the need b* the
level mentioned above "ould save the state BIK million over 1ve *ears#
)epending on the terms o! the deal and its success!ul outcome the investors
"ould be repaid their capital investment plus I percent or 45 percent o! the
stateAs savings !or a return o! B4#D million or BK#L million#
Using social impact bonds to !und earl* childhood education
'he scenario: @e proposed scaling high6/ualit* earl* childhood
classroom instruction "hich is considered a top6tier evidence6based practice
!or I555 lo"6income L6 and K6*ear6olds in a state that does not currentl* have a
state6!unded public pre68 program# 'he program cost "as BD5 million over
seven *ears# %n this situation a cost6sharing agreement bet"een the state
and !ederal governments "as proposed to repa* an investment o! BKJ#I
million "ith a potential return on investment o! I percent or B7#7I million#
@ealth management advisors could match their clients to social impact bond
deals that 1t their social missions and needs !or e.pected rates o! return#
%nvestment 1rms could provide capital !or pro;ects serving lo"6income
communities in the geographies the* serve# @hile there are man*
di2erent roles that each investor group could pla* the nonprescriptive
structure o! the case studies does not set roles !or the potential investor
t*pes#
'he discussions at the t"o meetings provided valuable insight into ho"
di2erent t*pes o! investors vie" their roles in social impact bond
transactions but it must be ackno"ledged that there is a limit to "hat can
be e.trapolated !rom the comments o! these K5 participants# 'he sample
si0e is small and the participants "ere primaril* responding to t"o case
studies o! S%3 transactions+though man* participants e.panded the scope
o! the conversation be*ond the case studies# 'he ma;orit* o! participants all
o! "hom had basic kno"ledge about ho" S%3s "ork are e.ploring
investment opportunities though some are skeptical o! the tool# And
because the aim "as to !ocus on the relationship among investors o! the
t*pes that "ould pa* the up!ront costs in social impact bond agreements the
primar* voices in the conversation came !rom private investors rather than
!rom government intermediaries service providers or evaluators all o!
"hich pla* important roles in making social impact bonds possible#
@ith these limitations in mind the t"o meetings underscored t"o basic
issues that "ill be critical to the ultimate success or !ailure o! the social
impact bond as a 1nancial mechanism in the United States# First each o! the
di2erent pla*ers at the table must clearl* communicate their o"n
motivations limitations and abilities as "ell as seek to understand the same
o! other actors# Second peer net"orks have a po"er!ul role to pla* in both
spreading kno"ledge about social impact bonds and !acilitating potential co6
investment in individual agreements#
Understanding diferent investors
3e!ore "orking "ith di2erent t*pes o! institutions it is important to
understand ho" and "h* each institution operates the "a* it does# 'he one6
on6one calls "ith participants prior to the meetings dre" out ke*
considerations that each t*pe o! investor+!oundations C)F%s and
investment 1rms+"ould "ant the other investors to kno" be!ore
collaborating on a given investment#
'he phone conversations made it clear that mission pla*s a crucial role in
determining "hether the collaboration makes sense# According to the
intervie"s a !oundation o!ten decides "hether to get involved based on 1t
"ith its mission strategic priorities and programmatic areas o! !ocus#
Similarl* "ealth management advisors emphasi0ed a need to consider the
individual mission and risk port!olio o! each client#
Several o! the C)F%s and !oundations intervie"ed noted the talent o! their
sta2s# C)F% sta2 provides technical assistance along "ith the diligence
structuring and reporting !or deals# 'he sta2 o! !oundations pointed out that
the* have intellectual capital to share and the* "ant to be involved earl* in
the process# And !oundation participants noted potential collaborators should
not vie" !oundations as checkbooks but as thought partners "ho have ideas
and kno"ledge to contribute#
Additionall* participants said collaborators should not assume that C)F%s
and !oundations al"a*s have grant or investment capital available# 'he
capital available !or C)F%s to deplo* depends on the capital invested in the
organi0ation# Foundation budgets are o!ten committed !ar in advance so a
!oundation might not have the He.ibilit* to make an immediate grant or
investment#
'he !oundation sta2 also pointed out that potential collaborators should not
assume !oundations are e.clusivel* interested in using an* one t*pe o!
capital: 'he* have the abilit* to make grants "hich re/uire no pa*back=
program6related investments or $R%s "hich are investments that !ocus on a
charitable mission and range !rom 5 percent to belo"6market rate returns=
and mission6related investments or :R%s "hich intend to achieve a market6
rate return "hile advancing the !oundationAs mission# %nternall*
most !oundations split investment and grant6making !unctions into separate
departments "hich might mean di2erent decision6making processes and
priorities#
'he topic o! risk came up among all investor t*pes# Respondents "ho
represented large investment houses noted that their 1rms are generall* risk
adverse and e.pect a return commensurate "ith the level o! risk# 'he "ealth
managers stated that the* o!ten have clients "ith a range o! tolerance !or
risk# According to C)F% sta2 !oundations or the public sector o!ten assume
risk "hen private investors are un"illing to do so#
(o"ever it is important to keep in mind that not all organi0ations and
individuals "ill accept high risk# 'he !oundation sta2 stated that other
collaborators should not assume that !oundations "ill assume all o! the risk
in the deal or that risk should be shared among investors# @hile some
!oundations might be interested in using grant $R% or :R% capital !or a risk*
investment not all are#
Finall* the !oundation and C)F% sta2 intervie"ed brought up the importance
o! sustainabilit*# @hen considering "ork on an initiative a !oundation "ill
o!ten consider "hether the initiative can be sustained over time and ho" it
relates to the !oundationAs other priorities and to observable societal
changes# C)F%s brought up the issue o! sustainabilit* less around the
outcome o! the initiative and more as a /uestion about S%3s as a 1nancial
product# 3ecause each social impact bond transaction takes a
considerable amount o! resources to negotiate the C)F%s noted that it is
commonl* pre!erred to have a product or broad !und that can support
multiple transactions#
Importance of networks
'he one6on6one calls o2ered a glimpse into ho" each investor t*pe "ants to
be understood b* other investors but the discussions underscored ;ust ho"
instrumental net"orks are to success# Eiven the comple. structure o! social
impact bonds potential investors can greatl* bene1t not onl* !rom
understanding one another but also !rom calling on the e.pertise "ithin their
net"orks# 'hat is to sa* no one entit* has ever*thing needed to address the
problems it strives to solve# <ooking at social impact bonds through this t*pe
o! lens allo"s each group to bring its non1nancial resources to the table to
strengthen the collaboration#
$articipants repeatedl* noted the importance o! kno"ing "here to turn !or
guidance# )uring the ;oint discussion meetings "hen an issue arose that the
group at the table did not have the e.pertise to address the conversation
/uickl* turned to identi!*ing the best organi0ations and people to provide
guidance and sub;ect6matter e.pertise# For instance in the case stud* that
revolved around preventing child abuse and neglect "hich had a lo" level o!
evidence about the e2ectiveness o! the intervention participants indicated
that the* "ould seek out sub;ect6matter e.perts to 1nd out ho"
the intervention compares to other programs#
Cultivating a net"ork that e.tends be*ond an individualAs or an
organi0ationAs area o! e.pertise increases an investorAs abilit* to conduct
solid due diligence to determine ho" or "hether to enter an investment
collaboration# &o organi0ation can be an e.pert on ever* issue communit*
or geographical area and it is important to recogni0e the limits o! an
organi0ationAs kno"ledge# 'he investment 1rms C)F%s and !oundations all
appreciated being able to call on e.perts to more deepl* understand
potential investment opportunities and assess risk#
%n addition to identi!*ing issue e.pertise net"orks enable investors to
understand the bigger picture be*ond the speci1c transaction under
consideration# :ost social problems do not e.ist in isolation and having a
solid understanding o! other contributing !actors the communit* conditions
and the polic* environment e/uips investors to make better more in!ormed
decisions#
Foundations ma* be particularl* "ell suited to !acilitate these net"orks
given that the* have strong relationships "ith the public private and
nonpro1t sectors# Foundations o!ten kno" the other public and private
!unders that serve a particular geographic or issue area allo"ing them to
map out the interventions and resources that currentl* e.ist and are
available# 3e*ond intellectual capital place6based !oundations can
bring conversations to the communit* level to garner input !rom a range o!
stakeholders "ith di2erent perspectives on ho" best to tackle a given
problem#
$articipating !oundation leaders emphasi0ed the need to look be*ond one
service provider or one intervention as individual social problems are o!ten
closel* enmeshed "ith others# For instance improving education outcomes
ma* re/uire that attention be paid to the health sa!et* and economic
conditions o! communities among other issues# Furthermore the !oundation
leaders described a desire to drive s*stems change in communities and
e.pressed hope that investing in a social impact bond could contribute
to that goal#
C)F%s and the communit* development divisions o! large investment 1rms
have cultivated net"orks !or delivering capital to lo"6income communities#
Some participants cited their involvement "ith <o"6%ncome (ousing 'a.
Credit transactions as a reason "h* both t*pes o! investors+C)F%s and
investment 1rms+"ould bring kno"ledge and e.perience about !acilitating
multistakeholder investments#
Conclusion
As conversations about social impact bonds continue it is help!ul to
understand "hat drives potential collaboration among investors# Since each
institution has multiple "a*s in "hich it could participate it is not use!ul to
make assumptions about "hether or ho" an* one organi0ation "ould "ant
to collaborate# 'aking time to get to kno" an organi0ationAs mission sta2
talent available capital appetite !or risk relationship "ith government and
sustainabilit* goals can help bridge the perception gap among
potential investors# $articipants at our discussions highlighted the role o!
net"orks in identi!*ing e.pertise and understanding the bigger picture
be*ond the individual S%3 transaction# 3e*ond access to 1nancial capital
investors have intellectual and o!ten communit* capital that can be help!ul in
assessing "hether to enter a deal#
%n addition to improved relationships and understanding among investors
the success o! social impact bond collaborations rests heavil* on ho"
government incentivi0es investment and collaboration# For an in6depth
e.ploration o! the role o! polic* in incentivi0ing private investment !rom
!oundations C)F%s and investment 1rms read the accompan*ing CA$ issue
brie! ,%nvesting !or Success: $olic* Guestions Raised b* Social
%nvestors- "hich !urther e.plores 1ndings !rom these social impact bond
investor discussions#
@hether social impact bonds continue to gro" the e.ercise o! e.ploring
motivations among di2erent t*pes o! actors can in!orm other investor
collaborations# 'he groups o! investors represented at the meetings+
!oundations C)F%s and investment 1rms+"ill all continue to provide crucial
1nancial and intellectual capital to tackle social problems# 'he more the*
understand about one another and the more the* connect "ithin and be*ond
their o"n sectors the better their chances o! advancing social impact#
Kristina Costa was a Policy Analyst in economic policy at the Center for
American Progress at the time of the drafting of this brief. Laura Tomasko is
a network developer at the Council on Foundations.
The Center for American Progress would like to thank The ockefeller
Foundation and The California !ndowment for their generous support of
these meetings.
Financial professionals are increasingly apprehensive over the traditional accounting model.
Financial statements, the main product of the traditional accounting model, are extremely
inadequate for reporting the valuations behind a business. Real values, not book values, are
the focus of attention within financial management. According to New ork !niversity , a
typical set of financial statements will only disclose about "#$ of the market value of a
business. %n order to bridge the gap between market values and book values, we need to
recogni&e something called intellectual capital.
'y using a set of intellectual capital accounts, an organi&ation better understands and
communicates the sources of value. !nlike financial accounts, intellectual capital accounts
have a long(term perspective. )hey stress the importance of spending time and resources
on the intangibles within the business. )herefore, intellectual capital accounts support
growth, development, and innovation. )hese are the real sources of value within a
business.
%n a world where knowledge is critical, intellectual capital accounts will capture and report
knowledge as one of the principal assets within the business. *e no longer look at our
business within the confines of the 'alance +heet, focusing only on fixed tangible assets.
)he intangible assets ,such as knowledge, people, customers, systems, etc.- represent the
stimulus for growth and value creation. )he use of intellectual capital accounts can provide
several benefits, including.
( +tresses the importance of developing knowledge, people, technology, and other
components of intellectual capital.
( +upports organi&ational development in those areas that have the biggest impact.
( /rovides a better indication of long(term growth.
( Assists in strategic decision making since we now have a better understanding of where
our growth comes from.
( +upports how financial capital is deployed and managed, improving returns and financial
performance.
+etting up a set of intellectual capital accounts can be very creative. 0ost organi&ations
seem to focus on at least four resource categories.
". 1uman Resources ( 2nowledge, education, qualifications, abilities, strategic thinkers,
etc.
3. 4ustomers ( 5oyalty, retention, brands, agreements, etc.
6. )echnology ( Networks, data warehousing, executive information systems, etc.
7. /rocesses ( 8alue added activities, efficiencies, cost, etc.
%ntellectual capital accounts will need to capture the values associated with intangible
resources within the four categories defined above. %n order to accomplish this, we will need
to establish a structure or definition for each intellectual capital account. %ntellectual capital
accounts are often defined within three measurement layers.
". 9efine what needs to be measured, such as level of professional development of
personnel.
3. 9efine the metric to be used, such as number of continuing professional development
hours completed.
6. 9efine the desired outcome, such as :; hours average within the organi&ation.
%n conclusion, resource categories are the foundation for building the content of intellectual
capital accounts. )he ob<ective is to capture through measurement your position, compare
the results through reporting, and take action to improve how intellectual capital is being
managed. )his in turn leads to better implementation of the corporate strategy and vision.
And this will lead to higher market valuations.
=