What is a social licence for business?

The notion of a ‘social licence to operate’ has its roots in the mining and extraction sector. As Joyce and Thomson (2000: 52) note:

“A social license to operate exists when a mineral exploration or mining project is seen as having the approval, the broad acceptance of society to conduct its activities…Such acceptability must be achieved on many levels, but it must begin with, and be firmly grounded in, the social acceptance of the resource development by local communities.”

Our project investigates the feasibility of extending this idea from a single sector to provide a general constraint on the behaviour of private sector organisations.

There have been a range of systemic scandals in recent years (for instance, those associated with the financial crash of 2007-8, the diesel emissions scandal in the car industry, and various data sharing scandals) which have served to show that at least sometimes companies do not properly consider the social consequences of their business decisions. These events have led to a decline in public trust in the ability of the private sector to do social good and a recognition amongst many business leaders that change is needed.

Furthermore, in light of the serious challenges society today faces – from responses to the current pandemic to climate change – it is clear that new ways of framing the relationship between the state and the private sector are urgently needed. A Social Licence for Business framework is one possible route for harnessing the considerable power of the private sector to help solve the problems society faces.

The Social Licence for Business framework begins with the recognition that the relationship between business and society is based on reciprocal benefits: a company agrees to provide goods or services to consumers and a society agrees to provide a range of services which make business operations possible (things like protection under the law, limited liability for corporations, a good transport system, a healthy and well-educated workforce, etc). For it to be rational for society to provide these goods to private sector organisations, however, companies must undertake not to exploit the societies they serve. Thus Borg 2020 argues that the social contract in place between society and the private sector means that society is both (i) entitled to demand that businesses operate in a way that contributes to the social good and (ii) that it is permissible for societies to legislate about the way in which firms must act in order to fulfil their social purpose. The statement of the social value a firm intends to create constitutes that firm’s social purpose. The social licence framework provides the mechanism by which society can ensure firms abide by their social purpose. These two ideas underpin the Social Licence for Business framework.

 Some terms of a social licence will be entirely general, for instance, all social licences might require that ‘a firm should not act in such a way as to aggressively minimise its tax liabilities, rather firms should accept that they need to make reasonable contributions to the income from taxation of the societies in which they operate’.

Other terms, however, will be specific to an individual organisation. The precise details of a social licence would need to be worked out through collaborative dialogue between governments, business, social pressure groups, immediate stakeholders, and the wider public (de-Miguel-Molina et al 2019), but they should reflect the kind of activity the firm undertakes. For instance, it seems plausible to think that financial firms face a particular requirement to create social capital in terms of individuals’ financial literacy or provision of banking services to the currently unbanked (Borg & Hooker 2017). Big C02 emitters like power companies might have CO2 reduction as part of their social licence, while firms in other sectors, with less capacity to create change around climate issues, might have only CO2 emission maintenance written into their licence (with reductions in these sectors being incentivised rather than required).

It is important to note that a Social Licence framework would instigate a constraint on business behaviour based on principles rather than standard regulation. This is important because, arguably, existing regulatory frameworks are of the wrong format to bring about raised ethical standards in business (Borg 2020, Mayer 2013). Introducing a social licence framework for private sector organisations would thus constitute a major shift in the way in which governments seek to exert control over business behaviour.

Any such major shift should of course not be considered without due diligence. Thus the aim of our current project is to begin this due diligence procedure – to explore the costs and benefits of imposing a social licence framework, in particular assessing its strengths and weaknesses as against the more fragmented conditions that are currently being imposed on firms which access state aid relating to Covid-19 relief.