What Is Social License to Operate and Why Is It Important for Organisations?

The concept of social licence to operate has become increasingly important for organisations across all sectors in recent years. As public trust in institutions declines globally, companies must work harder to earn and maintain the approval of their stakeholders and communities. 

Elizabeth Proust AO FAICD, Chairman of the Australian Institute of Company Directors, explains the significance: "The social licence to operate is absolutely essential to ongoing community support [for organisations]."

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What is Social Licence to Operate?

Social licence refers to the ongoing acceptance and approval of an organisation's activities by its stakeholders and the general public. Unlike legal or regulatory licences, social licence is intangible and must be continually earned through responsible practices and engagement. 

As Richard Boele, National Leader of Human Rights and Social Impact Services at KPMG Australia, notes: 

"Organisations can no longer view trust as an asset that they can buy or re-build after a crisis, but one that must be earned and maintained on an ongoing basis."

Why is it important?

The KPMG-AICD Trust Survey found that 94.1% of directors agreed or strongly agreed that trust was important to their organisation's long-term sustainability. Maintaining social licence is crucial because: 

  • It provides a "licence" for the organisation to operate and grow
  • Loss of social licence can have severe financial, legal and regulatory impacts
  • It reflects changing community expectations of corporate behaviour

As Boele states: "Society has a powerful ability to tell companies when they are no longer wanted."

Key Stakeholders

The survey identified the most critical stakeholders for maintaining trust as: 

  • Clients/customers (82.3%)
  • Employees (81.6%)
  • Local/regional community (35.0%)

This reflects the importance of engaging not just with shareholders, but with a broader range of stakeholders impacted by an organisation's activities.

Building and Maintaining Social Licence

Key factors for building trust and social licence identified in the survey include: 

  • Open communication and engagement with stakeholders (82.0%)
  • Transparency in business practices and decision-making (78.0%)
  • Understanding stakeholder issues (64.7%)

Boele emphasises the need for "meaningful consideration of the issues and impacts raised and perceived by your stakeholders" in order to predict and address potential impacts.

The Changing Landscape

The concept of social licence to operate is part of a broader shift in corporate governance and responsibility. In the early 21st century, a company's performance is no longer measured solely by financial metrics, but also by its corporate social responsibility (CSR) and ability to create sustainable value for society. 

This evolution is reflected in the ASX Corporate Governance Council's proposed 4th edition of its corporate governance principles and recommendations for listed companies. The new edition reinforces the need for companies to act in lawful, ethical, and socially responsible ways, explicitly embedding the concept of social licence to operate into corporate governance standards. 

The debate around these changes reflects deeper underlying issues in corporate governance theory. The traditional view focuses solely on managing relationships between a company, its board, and shareholders. An alternative view gaining traction considers how well a company manages all of its valuable relationships, including those with non-shareholder stakeholders.

Global Trends 

The emphasis on social licence aligns with global trends in responsible business practices. For example, environmental, social, and governance (ESG) factors are increasingly influencing investment decisions. In early 2018, Blackrock CEO Larry Fink called for companies to take their social licence seriously and integrate ESG matters into their operations. 

These shifts are also influencing regulation. 'Soft' law and industry standards are increasingly informing the interpretation and application of 'hard' corporate law. This trend is evident in areas such as climate risk management, where legal opinions suggest directors may breach their duties if they fail to address climate-related risks. 

Challenges and Opportunities 

While incorporating social licence into governance standards presents challenges, it also creates opportunities for organisations to strengthen stakeholder relationships and create long-term value. As Boele notes: 

"Organisations that are responsive to changing community concerns and expectations" are best positioned to maintain their social licence. 

Some business leaders and legal experts have expressed concerns about the potential vagueness of the social licence concept and its implications for directors' legal duties. However, proponents argue that considering stakeholder interests beyond shareholders is consistent with long-term value creation and reflects evolving societal expectations of business.

 

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