Director perceptions of social licence to operate in corporate Australia

Tuesday, 28 July 2020

Assoc Prof Vivienne Brand & Dr Justine Lacey photo
Assoc Prof Vivienne Brand & Dr Justine Lacey

    When, in 2018, it was proposed that ‘social license to operate’ be added to the ASX Corporate Governance Principles, the reaction was immediate and polarised. The response resulted in the phrase being replaced with terms such as “reputation” and “standing in the community”. But what does this contentious phrase really mean to directors in corporate Australia and how does it impact the day to day and longer-term decision making of boards? Here, 24 experienced directors share their insights.

    Social licence to operate garnered extensive publicity in 2018 during the 4th edition revision of the ASX Corporate Governance Principles. At the time, the ASX Corporate Governance Council referred to the proposed inclusion of social licence as ‘overwhelmingly, the most commented upon and polarising of the issues in the consultation’. However, despite some high-profile commentary from Australian company directors in the media, there has been little exploration of broader director perspectives on the issue and what, if any, its impacts are on corporate decision-making.

    A recent interview study by CSIRO and Flinders University explored these concepts with 24 highly experienced Australian company directors representing more than 80 Australian companies across diverse portfolios including manufacturing, consultancy, resources and energy, food and beverages, technology, and banking and financial services. The companies ranged from smaller proprietary companies to large publicly-listed organisations with market capitalisations up to and in excess of A$50 billion. Here is an insight into what they shared.

    No agreed definition of social licence

    If there was a singular point of agreement in the study, it was that there is no accepted or agreed definition of social licence to operate. While some respondents believed social licence was well understood and clearly defined, many others saw it as very similar to and overlapping with other terms such as CSR and ESG. As one said, ‘to a lot of people it’s all a big blur’.

    Some spoke of their concern that militant, non-representative parts of the community could ‘weaponise’ social licence, effectively taking companies hostage in pursuit of particular social aims. One director said that social licence to operate could be ‘an open door to special interest groups, to challenge the decisions being made by corporations’. Others preferred terms that enjoy legislative and judicial consideration, such as ‘honestly, fairly and efficiently’, or one that could be more readily measured and tracked, such as reputation.

    Overall there was a lack of consensus on what the term means, consistent with concerns raised at the time of the ASX Corporate Governance Principles revision. However, there was a strong commitment to the importance of directors actively monitoring a company’s relationship with its wider stakeholder base.

    Social licence as good business

    For many directors, there was an awareness that however the phrase social licence to operate was defined, the overarching concepts are business as usual: ‘social licence is every day’. Directors saw transparency and communication as crucial to ensuring good relations between the company and stakeholders and to maintaining trust. This included being responsive to the company’s operating environment, listening to those impacted by the company’s operations and having an understanding of the impacts of the company on stakeholders. As one high-profile director put it, there is a need to ensure there is conversation not just ‘in the echo-chamber … of the board’ but to reflect on wider views and perspectives. In all of this, ‘transparency is really key’, another said.

    The importance of companies ‘doing the right thing’ was emphasised by many directors. As one director put it, ‘I think that most companies understand that doing the right thing is good for business’. Another said, ‘if you’re doing the right thing in the best interests of the company, then that means doing the right thing by all of your stakeholders, not just your shareholders’. For experienced directors the importance of understanding the broader ecosystem in which the company was operating was essential to success.

    Concluding thoughts: social licence as solvency

    Longer range views of a company’s prospects were significant for many directors when assessing the implications of social licence to operate. As one senior director expressed it, ‘I don’t think there’s any question that when companies consider the longer-term interest of the company and shareholders they need to consider the interests of every constituency and … that’s an absolute truth’.

    Finally, the study revealed that directors are highly engaged with their companies’ impacts on stakeholders and see this is an integral part of what they do, necessary to the profitable futures of their organisations. A key idea – expressly pointed to by some, and implicit in what was said by others – was that maintaining a company that is functioning and solvent is itself a form of social licence.

    Directors emphasised that only then can a company provide ongoing jobs for employees, maintain contracts with suppliers, and contribute to society generally: ‘sustainable means continuing to be in business and making money – so you could be out there doing your best for everybody but you’re going backwards and that’s not going to help anybody including your employees’.

    A highly relevant perspective in light of the current COVID19 crisis and its aftermath.

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