Barbara Gray, CFA – June 5, 2012 “CEOs are looking beyond the benefits of connected supply chains and more integrated back-office systems. Their focus is shifting to the power and potential of recent advances in social media and analytics to reimagine connections among people – whether that’s customers, employees, partners, investors, or the world at large.”

I re-read the opening remarks by Ginni Rometty, President & CEO of IBM Corporation, in the 2012 IBM CEO Study and pulled out my highlighter, excited to dive into the report. As the title suggests, the study, which was based on face-to-face conversations with more than 1,700 chief executive officers in 64 countries, is all about how social media is bringing in a higher level of connectedness. This got me to thinking about the section I wrote in my recent report: “LinkedIn: Disrupting By the “Power of We” about how LinkedIn’s power to create bridging capital has the potential to create “The Medici Effect”and spawn a Second Renaissance in intellectual capital. Then I thought about LinkedIn itself and the four other “heart and soul” companies – Chipotle Mexican Grill, lululemon, Starbucks, Whole Foods Market – and it struck me that another thing they have in common in terms of their DNA is innovation.

For the past two years, I have been mulling the concept of how social media will act as a catalyst to structurally shift companies’ risk/growth profiles. If you recall, back in January 2011, I suggested that social media was “an exposing disruptive force” and then in November 2011 in my Social Capital Play report, I introduced the radical notion that social media was ushering in the era of the Social Revolution. Interestingly, the following month, Time magazine named “The Protestor” as its Person of the Year. And in the New Year, the Stop Online Piracy Act (SOPA) protests demonstrated how social media allows grassroots movements to build momentum at a level of intensity and pace never witnessed before by allowing individuals to self-organize and by increasing their clout and bargaining power. But I don’t think investors have yet recognized how the Social Revolution will be negative for companies who derive their competitive advantage through exploiting their customers, employees, business partners, communities, and the environment. The reality is that over the years, these exploitive companies have built up distrust and negative social capital with their stakeholders. Unlike goodwill, negative social capital (i.e. badwill), is an intangible that does not show up on the balance sheet so investors have largely been able to ignore this inherent liability, However, social media empowers these exploited stakeholders to fight back. The bottom line is I expect the Social Revolution to lead to an erosion in the competitive moats of these exploitive companies, resulting in an increase in their risk profile and decline in future growth opportunities.

If you remember, I launched Brady Capital Research to focus on companies working to make a positive difference in the world. So I got to thinking about the positive side of social capital and the IBM Connectedness study. Hmm, maybe social media is ushering in the Social Era – and in addition to giving rise to the Social Revolution, it is also giving rise to the dawn of the Social Renaissance.

It is times like these that I wish I had studied the Humanities at university instead of Business. I am a huge fan of the Renaissance as I have visited Florence on many occasions, I like to paint and draw, and one of my favorite books that I read over a decade ago is Michael J. Gelb’s inspiring book “How to Think Like Leonardo daVinci”. What I found interesting when I started reading up on the Renaissance is that the Humanism Movement focused on teaching citizens subjects such as grammar, rhetoric, history, poetry, and moral philosophy to enable them to engage in the civic life of communities and persuade them to act virtuously and prudently. The Humanism Movement was a reaction against the utilitarian approach of the Scholastic Movement, which focused on preparing men to be doctors and lawyers with attention to rules and details. I was thinking about this as it pertains to Capitalism today – maybe if we encouraged young people to study the humanities instead of business and pursue their real passions instead of just pursuing the dollar, we would have a more humanistic form of Capitalism. It will be interesting to watch events unfold over the next decade. As empowered customers, employees, and business partners start to revolt against companies that have been able to get away with exploiting them, I have no doubt we will see their competitive moats erode. This will lead to a natural attrition of the bad companies, raising the morality level of Capitalism. But what I think will lead to the true enlightenment of Capitalism is the Social Renaissance.

Vitruvian Man by Leonardo da Vinci, Galleria d...

Vitruvian Man by Leonardo da Vinci, Galleria dell' Accademia, Venice (1485-90) (Photo credit: Wikipedia)

In the coming era of the Social Renaissance, companies that have established a strong level of trust and built up positive social capital with their customers, employees, and business partners will be able to really leverage the higher level of connectedness and create new generative moats. These companies will now be able to capitalize on their existing authentic and strong relationships by leveraging the high level of enthusiasm and support for their brand and their greater purpose. This will enable them to further advance their movement by strengthening existing relationships and attracting new supporters. Our thesis is supported by the IBM CEO study, which forecasts social media utilization for customer interaction will rise from 16% today to 57% in five years. In addition, the increase in the flow of knowledge could lead to new collaborative partnership efforts, increasing the quality and frequency of innovation. The IBM CEO study really highlights the business case for heart and soul companies as it found the two top sources of sustained economic value are human capital and customer relationships and the three top organizational attributes are ethics and values, a collaborative environment, and purpose and mission.

The concept of a higher level of connectedness sounds promising, as do IBM’s three key recommendations that companies empower employees through values, engage customers as individuals, and amplify innovation through partnerships. However, I suspect very few companies have a high enough level of trust and goodwill in their existing relationships with their customers, employees, and business partners to be able to successfully implement these recommendations. In fact, this higher level of connectedness could accelerate the erosion of the competitive moats of exploitive companies and lead to their hastened downfall. The reality is that the companies poised to really prosper during the Social Renaissance are the ones with heart and soul that have a greater purpose and are transparent, authentic, and engaging in terms of their core values, culture, and community.

The bottom line is the Social Era is fostering the rise of two conspiring forces leading to the enlightenment of Capitalism: the Social Revolution and the Social Renaissance.

Disclosure: I have a LONG position in the following stocks: Chipotle Mexican Grill (CMG-NYSE), LinkedIn (LNKD-NYSE), lululemon (LULU-NASDAQ), Starbucks (SBUX-NASDAQ), Whole Foods Market (WFM-NASDAQ).

Enhanced by Zemanta