Shakerhill Partners

Social License: A New Challenge for Boards

Alan

Alan R. Hibben, CPA CA, CFA, ICD.D

Corporate Director
How should boards respond to the growing pressure on more businesses to defend their rights to operate?

For those in the mining industry, the term “social license” has become part of everyday board conversation. In the near term, however, I expect that a much wider variety of companies will come to encounter this concept and the governance challenges that come with it.

 

The origin of the term “social license to operate” is generally attributed to Jim Cooney, Director of International and Public Affairs at Placer Dome in 1997. A classic definition is offered by Thomson and Boutilier in the SME Mining Engineering Handbook: “Social License is rooted in the beliefs, perceptions and opinions held by the local population and other stakeholders about the mine or project. It is therefore ‘granted’ by the community… The social license has to be earned and be maintained.”1 

 

From a mining perspective, there is a very clear difference.between “social license” and the standard permits, regulations, legislation and other restrictions, where the ultimate authority is the courts or a government unit. As community interests change and as the definition of community changes, so too does the ability to earn a social license. More disturbingly, the ability to earn and keep a social license may be affected by communities of interest (including NGOs and lobby groups) that are not directly affected by a company or project. However, mere compliance with laws and regulations is unlikely to suffice, and is increasingly ignored by some communities who believe they have interests in an issue, no matter how remote their direct connection with the project might be.

 

To give a concrete example from Canadian mining, consider the “duty to consult” with respect to aboriginal interests in mining areas. Originally this duty was discussed by the Supreme Court of Canada in the 1990 Sparrow case, and elaborated in the 1997 Delgamuukw case, to reflect the duty of the Crown to consider aboriginal interests in the determination of land use. However, it has now been expanded (although not clearly in law) to include a duty for mining companies to reach accommodation with aboriginal interests in mining territories. There is no clear legal basis for this obligation – but governments take such an obligation into account when deciding on permits, as they are concerned about political fallout. There is no established framework for this accommodation process, as any two projects will have vastly differing and perhaps even contradictory aboriginal interests. However, mining companies have learned how to manage in most communities to listen to concerns and do the best job they can to accommodate such interests. In some areas of the world this results in formal community support agreements, voted on by the community and very often involving a transfer of “benefits,” none of which are prescribed by law. The prime issue with “duty to consult” as it is now understood by mining companies and aboriginal interests is that there are no legal boundaries to a negotiated settlement.

 

In modern mining, companies start planning to earn and maintain their “social license to operate” before even the first chipping hammer has struck an outcrop. Mining companies will now first decide which jurisdictions can be trusted to allow an open, transparent and ethical approach to earning the social license. Then they will spend time, effort and money to open conversations with at least the most local community to assess whether exploration permits will be welcomed or not. Only then will substantial dollars be committed to exploration and ultimately development.

 

As discussed, the earning and maintenance of social license is well ingrained in quality mining management and governance. It takes a great deal of time and money to get right. Now, however, it appears that the need for social license is rapidly expanding beyond the mining sector.

 

In Canada, we have seen this concept extend significantly to pipelines, heavy-oil extraction, power plants, and more. But more examples are emerging every day:

 

  • In the U.K., Starbucks has agreed to make a voluntary £10-million tax payment in each of 2013 and 2014 after activist groups complained that due to its largely legal transfer-pricing strategies, Starbucks was paying too little corporate tax in the U.K.
  • In Canada, Royal Bank of Canada was recently castigated for (legally) hiring a small number of temporary foreign workers, only to reverse the decision and apologize shortly after controversy broke out. The legislative response to this incident has likely caused grief to a wide swath of Canadian companies.
  • Yahoo CEO Marissa Mayer’s entirely reasonable but perhaps misinterpreted policy change to discourage telecommuting managed to offend a number of Yahoo’s key constituencies and likely took far more executive time than it warranted. Here Yahoo’s “social license” was impacted by a view that it was not supporting its prime user base.
 

These examples have the same central themes for companies seeking to manage their risk profiles. The companies were acting within their understanding of the law and likely in full compliance with their codes of conduct and internal guidelines on ethical behavior. However, as was clearly demonstrated, those conventional safeguards are no longer enough to protect companies from focused or widespread righteous indignation.

 

As concerns over corporate activity grow, more and more activists and celebrities — and in their wake, stakeholders and legislators — are holding companies to a higher level of pro-social behavior than ever before. Just as resource companies have had to justify their existence and their operating principles to more and more indirect stakeholders, it looks like all other kinds of companies will increasingly be held to account not just for the economic benefits they create, but for their commitment to what a diverse group of media, activists and celebrities deem to be the social good.

 

It might be worthwhile to contrast social license with reputational management and regulatory compliance. Boards have focused on reputational management for some time. This runs the gamut from brand support and dayto-day customer management to “doing good works.” All of these strategies are intended to put a “glow” around the company, improving its image primarily with customers, but also with broader constituencies that could influence the company’s success. Compliance management is an increasingly important part of corporate life, and both boards and management are spending increasing time and money on the ever-expanding list of compliance matters. Such compliance, however, generally affects government relationships more than the wider public — as long as corporations meet the requirements.

 

Social license, on the other hand, can be negatively affected by actions that are both compliant and in accord with generally accepted ethical standards – if there is an outspoken community that feels its interests (legitimate or not) are being affected. As an easy example, the proposed Keystone XL pipeline has generated opposition from a number of legitimate and serious environmental groups, even though, as the U.S. State Department has indicated, building the pipeline will have a negligible environmental effect at the margin. When aroused, however, these groups, as well as the related phenomenon of increasingly activist celebrities, can have a significant impact on companies’ abilities to execute on their business plans.

 

With many governments less and less motivated by principled governance and increasingly focused on governing by polls, even a small but very visible and media-savvy minority can effect major change in the business environment for an industry or a corporation. This is a dangerous trend, and one where most boards and managements will need to feel their way forward.

So what should companies be doing now to earn and maintain their social licenses?

 

First and foremost, it will be important to expand organizations’ horizons so that they begin monitoring broader constituencies of interest. These groups will be Corporate Governance Social License 42 | Institute of Corporate Directors / Institut des administrateurs de sociétés Issue / Numéro 169 | September / Septembre 2013 | 43 different for each company, but they will likely encompass local and regional community interests, as well as everwidening groups of NGOs and other actors that could have even a peripheral interest in the company’s activities.

 

Second, companies must step up their game with respect to social media. While social-media monitoring is an increasing part of communication management, companies should make efforts to extend their reach beyond the typical sites, and be ready to act at the earliest signs of developing interest. Companies should already be monitoring mentions of their names in a wide range of venues, from Twitter to Stockhouse. What is now important is to extend such monitoring to their broader industry impacts (think: “pipelines = dirty oil”). This monitoring must be sensitive enough that emerging controversies are brought early to the attention of the executive suite and the boardroom. 

 

Third, companies need to greatly increase their outreach to communities on a sensitive and intelligent basis. Thanks to the increasing speed and reach of social media, even minor corporate actions or decisions can now gain widespread attention. So local management must be empowered and encouraged to engage in proactive community outreach, well before any issue becomes uncontainable. Proactive communication, including proactive listening, is the best way to assess emerging issues and head them off at an early stage. If companies use community “town halls” or webcasts as a communication tool, they must be prepared to be open and listening at the same time. 

 

Fourth, internal communications need to accelerate so that local issues do not become regional or national before trained senior management can intervene. With the lines burring now between Twitter, blogging and serious journalism, it is now becoming easier to accelerate and inflame issues than it is to contain them. 

There are obvious pitfalls to getting social license wrong. Most can be avoided by taking steps such as those noted above. However, some problems are not so obvious. In one recent situation with which I am familiar, a company had done almost everything to ensure that community support for a new project was received and documented. Heroic efforts were made to listen and communicate proactively. However, things were still not going as well as they should have been. When a social license consultant (yes, they are out there, and you may be needing one) was asked what could be done, he said, “It’s about the money.” So while issues may be raised in the context of environmental impact or social justice, sometimes it’s really just about distributing the “benefits” a little more widely

 

This is what makes the concept of “social license” so difficult. It can often become a negotiation without boundaries or rules – much like the Canadian “duty to consult”.

 

  • Clearly, this is another element of the risk profile of the company that will need to be assessed and monitored. The board will want to know where responsibility lies within the company.
  • The board should educate itself more broadly on the constituencies of apparent interest in its company and industry, and ensure that proactive and reactive communication strategies are ready and available for both the chair and the CEO on major risk topics.
  • The board should ensure that it has a firm handle on the process of community engagement that is allowed under the company’s ethical standards. In a number of places in the world there may be expectations of community involvement that companies should assess against the wording and intent of the U.S. Foreign Corrupt Practices Act or Canada’s Corruption of Foreign Public Officials Act. In cases where it is indeed “all about the money,” local management might be tempted to make problems go away by well-timed donations to local communities, activists, or NGOs. This is a dangerous path.
  • In difficult situations, the board and management will want to be assured of high-quality independent advice. As this is a rapidly evolving area of risk, internal resources may be hard-pressed to be as experienced and nuanced as the emerging class of professionals.
 

So just when one might think that there could be no further area of serious focus for directors — here’s one more. The social license should be on every board’s agenda. And not just once a year.

 

Alan R. Hibben is a director of two Canadian public companies but has a day job at an unnamed financial institution. He can be reached at alan.hibben@rbccm.com

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