The Social License to Operate: A Concept Fit-For-Purpose?

David Murray, former chair of troubled investment firm AMP, has been called out as being unfit to meet shareholder expectations of modern boards, due to what many believe are outdated views on risk and governance frameworks.

One of the points of criticism is that Murray had criticised the notion of “the social license to operate” in a campaign against including this term in the ASX Corporate Governance Guidelines.

Does David Murray have a point? Do we even know what a social license to operate entails?

While businesses are arguably being held to a higher social standard than before, it is questionable whether the social license to operate, as a concept, is fit for purpose.

In a forthcoming book chapter, I examine concepts such as the “social license to operate” as well as similar notions such as “corporate purpose” and “stakeholder capitalism”.

The research concludes that the use of these concepts is unlikely to result in structural changes to ways of doing business – and their use is more likely to uphold the status quo.

What is a Social License to Operate?

The social license to operate has become embedded in sustainability reports, in CEO speeches and has been embraced by civil society. The concept emerged in the early 2000s in the resource industry, which had been “failing to convince some of its constituents and stakeholders that it has the ‘social license to operate’”.

The central idea is that companies should not only consider the dynamics of the market and the interests of shareholders, but they should also consider community concerns – and deal with these factors accordingly – in order to retain legitimacy and continue their enterprise.

In a nutshell, the social license to operate challenges the dogma of shareholder value maximisation, by emphasising stakeholder concerns in addition to shareholder returns.

Yet, despite its common acceptance, the social license “exists” on the basis of an unwritten agreement between business and society. Problematically, while an actual regulatory license has precise conditions, the social license to operate is intangible with conditions that are not universally defined, in addition to being subject to continuous change.

The burden of proof seems to lie with stakeholders to show what companies are doing wrong, not with companies to prove what they are doing right, while the absence of community protest may be interpreted as consent.

The idea of the social license suggests that it can be granted and revoked, propositions which are questionable.

While companies that act against societal values can suffer repercussions, if companies do not break the law these repercussions only have reputational and financial bearing, which suggests that the social license relies on the market to balance interests of companies and society.

This is why David Murray agitated against the social license becoming embedded in the ASX Corporate Governance Principles: embedding this concept into a normative framework would potentially turn the social license to operate into a regulatory stick.

Instead the social license, in its current form, strengthens the governing rationality of our times and helps to spread the model of the market to all domains and activities.

It remains uncertain whether this leaves stakeholders with enough leverage to challenge and change corporate conduct.

Corporate Purpose and Stakeholder Capitalism

Even before the start of the pandemic, the growth in inequality around the world has been blamed on the shortcomings of neoliberalism and capitalism.

In 2019, Larry Fink, CEO of Black Rock, the largest asset management company in the world, called on business leaders to consider the purpose of their company. “Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders.”

Fink argued that business should tackle socio-economic issues: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” 

The protagonists of corporate purpose are, ostensibly, arguing for a shift away from shareholder capitalism towards stakeholder capitalism.

Jamie Dimon – CEO of JPMorgan Chase, has also come out publicly to say that companies should consider the common good: “the [Covid-19] crisis must serve as a wake-up call and a call to action for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years”, he added that “[t]he last few months have laid bare the reality that, even before the pandemic hit, far too many people were living on the edge.”

However, Dimon was given a $US31 million bonus in 2019, surpassing pre-GFC bonus levels. During the early stages of the Covid-19 outbreak, a survey conducted in the US showed that 84 per cent of businesses had taken no action on executive pay. Two-thirds of companies had already made equity grants to executives and 94 per cent did not plan on making changes to these awards.

The growing criticism of neoliberalism and capitalism has prompted a re-examination of the foundational theses of these systems.

Yet, rather than acknowledging the downsides of relying on the market to balance social, environmental, and financial interests, regardless of demonstrable unfavourable social and environmental outcomes, these “anomalies” are accounted for by introducing new elements into the existing paradigm.

This is referred to as “Ptolemization”: instead of accepting a Copernican revolution in the face of evidence that the old system is failing, attempts are made to tweak the existing paradigm to account for anomalies.

The “social license to operate”, “corporate purpose” and “stakeholder capitalism” are concepts that originate from the business world and are routinely championed by CEOs.

This creates a paradoxical situation in which the companies and business leaders that benefit from the status quo are also the ones suggesting how the status quo should change.

The “social license to operate”, “corporate purpose” and “stakeholder capitalism” are therefore unlikely to structurally change business practices. While seemingly well-intended, these concepts are used to favour the market system ahead of the state system, and put private interests ahead of community outcomes.

A shortened version of this article was published in the Sydney Morning Herald.

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