Ethics Explainer: Social license to operate

Social license – or social license to operate – is a term that has been in usage for almost 20 years. At its simplest, it refers to the acceptance granted to a company or organisation by the community.

Of course anyone running a company would be aware that there are many formal legal and regulatory licenses required to operate a legitimate business. Social license is another thing again: the informal “license” granted to a company by various stakeholders who may be affected by the company’s activities. Such a license is based on trust and confidence – hard to win, easy to lose.

It’s useful to understand that the term “social license to operate” first came into the world in reference to the mining and extractive industries. In an era of heightened awareness of environmental protection and sustainability, the legitimacy of mining was being questioned. It became apparent that the industry would need to work harder to obtain the ongoing broad acceptance of the community in order to remain in business.

To give a simple example: a mining company may be properly registered with all appropriate agencies; it may have a mining license, it may be listed with ASIC and be paying its taxes. It may meet every single obligation under the Fair Work Act. But if the mine is using up precious natural resources without taking due care of the environment or local residents, it will have failed to gain the trust and confidence of the community in which it operates.

Over time, the social license terminology has crossed into the mainstream and is now used to describe the corporate social responsibility of any business or organisation. A whole industry has flourished around Sustainability and Corporate Stakeholder Engagement. And there’s a growing view that social responsibility can be good for long-time financial performance and shareholder value.

The social license to operate is made up of three components: legitimacy, credibility, and trust.

• Legitimacy: this is the extent to which an individual or organisation plays by the ‘rules of the game’. That is, the norms of the community, be they legal, social, cultural, formal or informal in nature.

• Credibility: this is the individual or company’s capacity to provide true and clear information to the community and fulfil any commitments made.

• Trust: this is the willingness to be vulnerable to the actions of another. It is a very high quality of relationship and takes time and effort to create.

The rise of social license can be traced directly to the well-documented erosion of community trust in business and other large institutions. We’re living in an era in which business (or indeed Capitalism itself) is blamed for many of the world’s problems – whether they be climate change, income inequality, modern slavery or fake news. Many perceive globalisation to have had a negative impact on their quality of life.

There’s a growing expectation that businesses – and business leaders – should take a more active role in leading positive change. There’s a belief that business should be working to eliminate harm and maximise benefits – not just for shareholders or customers, but for everyone. To do this, business would be actively engaging with stakeholders, including the most outspoken or marginalised voices; they should be prepared to listen, and reflect, on the concerns of these often powerless individuals.

There is no simple list of requirements that have to be met in order to be granted a social licence to operate.

Too often, social licence is thought to be something that can be purchased, like an offset. Big companies with controversial practices often give out community grants and investments. Clubs that profit from addictive poker machines provide sports gear for local teams and inexpensive meals for pensioners. Tax minimisers set up foundations; soft drink companies fund medical research.

Here a social licence to operate might be seen as a kind of transaction where community acceptance can be bought. Of course, such an approach will often fail precisely because it is conceived as a calculated and cynical pay-off.

The effective co-existence of businesses and individuals within a community requires the development of rich and enduring relationships based on mutual respect and understanding. That sounds like something we’ll all need to work on.