Social Capital: A New Strategic Play for Investors
Look for Companies with Heart and Soul
Barbara Gray, CFA, Equity Analyst, Brady Capital Research
For those of you who participated in the Monthly Briefing last Friday “Sure, They Say They're Socially Responsible: ESG meets CSR”, with Rick Frazier (Founding Member and Research Director of Concinnity Advisors LP) and myself, you probably got the sense that neither Rick nor I are big fans of ESG or CSR. Although it is important for investors to incorporate ESG (Environmental, Social, Governance) factors into their analysis and valuation process, we believe that ESG is only one piece of a company’s risk/growth profile. And while it is encouraging that more and more companies are starting to undertake CSR (Corporate Social Responsibility) initiatives, we view this as more of a defensive politically correct move. We are more interested in how a company actually treats all of its stakeholders (customers, employees, suppliers, community, environment).
As I stated on the call, I believe social media is leading to the creation of a new form of equity called social capital with the following four investment characteristics:
• Liquidity - Facebook, Twitter, and LinkedIn are global, dynamic, 24/7 social exchanges that convert a company’s stakeholder relationships into highly intangible liquid assets and/or liabilities called social capital.
• Time Horizon - Social capital is a new form of equity that we expect to appreciate in value as Facebook, Twitter, and LinkedIn’s user bases continue to grow, new social exchanges such as Google+ emerge, the number of user connections within and between different social exchanges grows, and corporate penetration and usage increases.
• Unique Characteristics - Social media empowers the individual with a platform to influence, expose, and disseminate.
• Regulatory and Legal – Social media provides concerned citizens with a platform to self-organize, increasing their bargaining power to push for regulatory and legal changes and reform.
As evidenced by the fact that Time’s Person of the Year for 2011 was “The Protestor”, I believe social media is the catalyst that is ushering in the era of the Social Revolution. I expect the Social Revolution will lead to a rise in legal and regulatory reforms, which will in turn, erode the economic moats of companies whose competitive advantage is derived by exploiting constituents in their stakeholder base. This will increase the company’s risk profile, reduce its future growth opportunities, and result in the creation of negative social capital. A company’s negative social capital with its stakeholders is an intangible liability that, unlike goodwill, does not show up on a company’s balance sheet. However, from a discounted cash flow (DCF) valuation perspective, the simultaneous increase in a company’s assumed discount rate and decrease in its expected growth rate will lead to a negative multiplier effect and contraction in the company’s value.
On a more positive note, as I explored in the research report I published in November titled: “Social Capital: A New Strategic Play for Investors – Look for Companies with Heart and Soul”, I am excited about how the Social Revolution will foster in a new source of competitive advantage for companies with heart and soul that are focused on making a positive difference in the world. I believe the strong and authentic stakeholder foundation of a heart and soul company will convert into a high velocity of social capital as the company leverages the high level of enthusiasm and deep psychological attachment to the company’s brand and greater purpose.
If you are interested in finding out more about my Social Capital investment thesis, I would be happy to send you a copy of my in-depth research report. I recently launched Brady Capital Research as an investment research platform to pursue my Social Capital investment thesis with the vision to: “build a community connecting investors with heart and soul companies and leading-edge business strategists”. I would love to share and discuss my ideas with you from the Intangible Asset perspective. You can reach me at firstname.lastname@example.org.
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