The Australian Stock Exchange (ASX) recently rescinded its proposal to changed governance rules that would add the inclusion of social license to the governance code for listed companies and therefore to the responsibilities of company directors.
Whether listed or not, these ASX regulations strongly influence the responsibilities and behaviours of company boards. They certainly become enshrined in director education and certification programs like the AICD Company Directors course.
The ASX backdown came after considerable pressure from the business community, some of whom argued that social license was a vague, even politically correct concept, which was open to broad interpretation and against which it would be almost impossible to measure and report.
Business argued that having a ‘social licence to operate’ was really a more trendy way of describing reputational risk, something for which well governed organisations had already built robust frameworks and metrics.
The term social license derives from the concept of community giving individuals and organisations permission to operate within it. The question is whether this is different than managing reputational risk. Inherent in both terms is the idea of earned trust.
The Australian Prudential Regulation Authority (APRA) formally issues licences for financial services providers to operate. With this, those institutions must comply with a set of rules.
Meeting regulatory requirements is an obvious prerequisite for boards and their organisations, but regulation rarely matches the higher expectations of customers. Legislators and regulators cannot keep pace with the speed at which consumer expectations shift in a digitally enabled world.
So at best, regulation in sectors like financial services might enable us to sleep better at night through the establishment of benchmarks for appropriate risk management of our savings and investments. It can rarely be considered a protection against bad or even malicious corporate behaviour in the broader sense, against which no regulation can truly protect us.
This lies at the heart of the recent discussion in Australia about revised ASX governance guidelines for listed companies. Trying to impose regulatory requirements on something like social license with its spectrum of interpretation is nigh on impossible.
Competent directors have always understood the central role of reputation to the success of their organisations. Consequently, it is incumbent upon them to keep abreast of community expectations and to formulate organisational policy frameworks to respond to, or even to anticipate change.
The key skill here is to filter genuine change in community attitude from the shrill harping of special interest groups or marginally sane influencers.
Climate change is a classic example of a issue that has become front and centre of risk management conversations at board level in major institutions. Initially, this was a tough and highly politicised issue and it still is thanks to a hardened rump of people who deny the inexorable flow of scientific evidence that it’s happening and that we’re contributing to no small degree.
Community issues generally have a tipping point at which debate moves from the fringe to the mainstream. In the case of climate change, this has already happened as, rightly or wrongly, major weather events, droughts and floods are attributed to it. Consequently, boards can be absolutely confident that the public expects the businesses they lead to articulate strategies, policies and actions to mitigate its impact.
Climate change and other issues are shaping community views on the rights of companies to operate and to market their products and services. Some would describe this as a ‘social license’ granted by the community, others as a factor in defining their reputation.
The reality is that whatever position an organisation takes, there is no wrong or right answer. That is in the eye of the beholder, the individual consumer, whose response will be influenced by that perspective.
There is no way to legislate for this.