Paradox of the social license to operate

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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 stakeholders that it had 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.

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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.

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.

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.

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

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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.

Dr Martijn Boersma is a senior lecturer in the Faculty of Business at the University of Technology Sydney.

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