The Laws of Relationship Capital, Part 9: The Ninth Law

by Adam J. Kovitz, CEO, Founder & Publisher

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So far in our discussion of Relationship Capital, we looked at who can and cannot possess Relationship Capital, some of the mathematical theory behind Relationship Capital and its relationship to Intellectual Capital. But what about the kind of capital we all know and love -Financial Capital? Hang on to your seats because the last two Laws of Relationship Capital do just that. If you’re intrigued by money and controversy, then you’re in for quite a treat.

The Ninth Law

The Ninth Law of Relationship Capital states that:

Financial Capital is merely a reflection of and cannot exist without some combination of Relationship and Intellectual Capital.

The implications of this are staggering and, if indeed true, changes the way we might perceive Financial Capital in the future. The Ninth Law suggests that Financial Capital is illusory at best!

Money Talks

We use money (Financial Capital) to pay our debtors, buy goods and services, invest in education for our children, save for retirement and fund projects and causes that we believe are worthwhile. We also use it to determine associated risk of an investment, which is a way by which we establish a ranking system to make a more informed decision as to whether or not an investment is worthwhile. Financial Capital also allows us to establish a ranking system to determine status; those with more Financial Capital are considered “rich” in the eyes of others and can afford more conveniences and luxuries. But where does this money come from?

When we think about all the ways one can earn Financial Capital, we come up with the following list:

1.) Working– the traditional job and/or career path

2.) Saving/Investing – utilization of a financial vehicle

3.) Inheriting – family and/or really good friends leaving it to you

4.) Winning – gambling, lotteries, contests

5.) Discovering – inventions, new revenue streams from brand new opportunities

6.) Gifting – donations or handouts

I have looked at each of these scenarios via thought experiments, ran these by several colleagues and have been able to reduce each of these down to Relationship and/or Intellectual Capital as the true source of wealth. In each case, I have not been able to prove the Ninth Law wrong, and I welcome anyone to try! In the meantime, let’s take a look at the following examples:

Working

Having a job is having an agreement to exchange your hard work and devotion to completing pre-defined (at least, usually pre-defined) tasks given by your employer in return for financial compensation usually paid out in salaries, wages, commissions and/or bonuses. But how do we get the job in the first place? If we were the “best candidate” for the position, it is because our resume clearly demonstrated our knowledge and experience. If we happened to have prior experience with the particular company or a few individuals within it from a prior job, our previous relationship with them has worked in our favor. The same holds true if we are in sales – often times the decision to select one sales professional over another is because of who they know. Of course in a family-owned business that is passed from generation to generation, preference (and job security) is given to those with last names the same as the owners (or those married in).

How about bonuses and commissions? They come from doing our jobs more effectively. How do we do our jobs more effectively? By building our own networks and increasing our own Relationship Capital or by applying our knowledge (building Intellectual Capital) in ways that go above and beyond traditional thinking that lead to higher profitability, lowered costs and/or improved efficiency. Getting a pay raise or even a better position is often attained the same way – it never hurts to have an exceptional working relationship with someone in a position of authority.

Conclusion: Financial Capital attained through employment is accomplished through other peoples’ assessments of your RC and IC.

Saving/Investing

Utilizing financial vehicles as a means if wealth is quite popular, with a bit of knowledge (IC) of time value of money and compounding interest rates, one can put their money in a savings account, money market, etc. When it comes to evaluating which is the right vehicle from which to choose, we use our IC to evaluate rates, return on investment, percent yield, expected time frame of the investment, etc.

In the case of real estate transactions, we must know the above plus have a sufficient amount of IC when it comes to location, local economy, benefits/consequences of other nearby development projects or land preservation initiatives. We also need to apply our RC to build our IC in this particular area as well. We need to build and further develop relationships with potential buyers, sellers, partners, local authorities and property managers as well. Their degree of helpfulness will be based upon your RC with them.

When investing in any major financial vehicle such as a bond fund, mutual fund, hedge fund, REIT or business venture, our decision whether or not to invest is often based upon the resumes of the management team. Are they competent enough to see this investment through fruition? Are they experienced enough to handle unforeseen issues that may threaten the stability of the project?

Conclusion: Financial Capital attained through investments is accomplished though investors’ assessments of RC and IC.

Inheriting

Leaving a legacy is important to many people. While the example of traditional inheritance is easy to see that Financial Capital is typically attained due to a prior relationship, there is another example we can explore as well. Life insurance, although it might also be seen as an investment, is also a form of inheritance in that our beneficiaries receive Financial Capital in the event of our own demise. Choosing such beneficiaries are, too, the result of prior relationships with others.

Conclusion: Financial Capital attained through inheritance is accomplished through others’ assessments of RC.

Winning

Winning Financial Capital may seem like sheer “luck”, but is it? Games of chance, require IC in their design. Intimate knowledge of such games and the odds require even more so. Those gamblers and gamers who seem to make a career out of it tend to have systems (IC) or have read or have been told about others’ systems (IC & RC). Even the act of willingly engaging in a game, lottery or contest means engaging in an inadvertent relationship with those who created it, worked on it, run it, etc.

Conclusion: Financial Capital attained though winning is accomplished via a hidden and often complex series of interactions involving RC and IC

Discovering

What about a person who discovers a sum of money (bill or note) left on the ground with no one else in sight? Simply put, as the money did not get there by itself, it must have been left there by someone, inadvertently or otherwise. Therefore, the finder now has an inadvertent connection with the loser of the money and therefore an interaction of RC.

Another example would be the classic case of inventors who discover something that has not yet been seen by others; new technology, new concepts. Based upon these discoveries, new revenue streams can be realized thanks to the building of IC as well as interactions with others (RC) who can help take the invention or concepts to market.

Conclusion: Financial Capital attained through discover is accomplished by inadvertent interactions of RC as well as the sharing of concepts (IC) and connections (RC) to achieve a common goal.

Gifting

Similar to inheritance, when we choose to give money to a friend, family member, house of worship or other cause in which we believe. It is because we share a bond of friendship, a feeling of love and/or respect or we simply relate to the cause. Because the RC and/or IC is so strong, we feel responsible, passionate and compelled to show our support via Financial Capital.

Conclusion: Financial Capital attained through gifting is accomplished via others’ assessments of the RC of the individual and/or the IC of the concept or cause.

The True Currency

So if all financial transactions can be “boiled down” to the complex interactions of RC & IC-possessing entities and their own relative assessments of other RC & IC-possessing entities, why do we need Financial Capital? The simplest answer is that we need to pay our bills! Unfortunately, my mortgage company does not yet accept RC or IC. Looking deeper, however, we, as the human race, must have some means to properly understand, measure and valuate such complex interactions, and so far our current economic system of Financial Capital, which got their start in post-feudal Europe of the 1600s, has been the best model to follow.

But is it still the best model?

As we look at our current economic issues in the U.S. as well as other parts of the world, one has to wonder. Fortunately, the Tenth and final Law of Relationship Capital discusses the advantage RC & IC have and their key role further development of both might play in the dramatic improvement in the way Financial Capital is viewed. Stay tuned for our last and final chapter in this series.

The Emergence of the Relationship Economy

Relationship Capital is the cornerstone of the Relationship Economy, which RNIA defines as an “economic system in which Relationship Capital influences the production, distribution, exchange, and consumption of goods and services.” I am proud to have contributed discussion of the Ten Laws of Relationships Capital to the upcoming book The Emergence of the Relationship Economy, now out as an eBook and in hardcopy. With a forward written by Doc Searls (of Cluetrain Manifesto fame), it is being considered a “must read” for anyone responsible for the strategic direction of their business. If you would like to purchase your own copy of The Emergence of the Relationship Economy, please click here.