Social licence: good governance or Trojan horse?

The social licence to operate is widely defined as community acceptance of an organisation and its operations.

Social licence to operate: a fair and measured approach to good corporate governance or a socialist Trojan horse? CPA Australia investigates why proposed changes to governance for Australian listed companies have stirred controversy.

“Board outrage at social licence push.” “New ASX board rules go too far.” “Social licence threatens corporations.” “Big business should resist social engineering masquerading as good corporate governance!” 

These are a few of the financial media reactions to the Australian Securities Exchange’s (ASX) Corporate Governance Council (CGC) draft 4th edition Principles & Recommendations (CGP&Rs) released for public consultation on 2 May. 

The 4th edition introduces the social licence to operate, widely defined as community acceptance of an organisation and its operations. Proponents argue this is good governance; critics see it as a threat to business. 

The ASX CGC’s governance instrument consists of eight principles and a further 29 recommendations, and the ASX listing rules will require them to be addressed in an annual corporate governance statement. 

This statement, either published as part of the annual report or presented on the corporate website, discloses on an “if not, why not” basis whether the listed entity has followed each recommendation. Additionally, there is explanatory commentary to both the principles and recommendations. 

Principle 3, which currently is “Act ethically and responsibly”, has been redrafted to read in what appears more positive language to state: “Instil the desired culture”. 

Consistent with this more forthright approach, the rationale behind Principle 3 can be seen in the introductory statement that: “A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”. 

These ideas are elaborated in the commentary to Principle 3, which says that: “A listed entity’s ‘social licence to operate’ is one of its most valuable assets”, whereas in the current version the “asset” potentially damaged is that of the entity’s “reputation”.  

The significant reorientation in emphasis is illustrated by further commentary that “preserving an entity’s social licence to operate requires the board and management of a listed entity to have regard to the views and interests of a broader range of stakeholders”. 

Introducing the notion of a social licence to operate in the commentary sets important context for understanding the scope and intent within recommendations found in Principle 3, yet at no point do these recommendations require a listed entity to have or articulate what its social licence is or ought to be (in an aspirational sense). 

Taking creative licence

Much of the more measured criticism around the wording of the social licence to operate relates to its nebulous and subjective character and that you cannot “have” or “hold” such a licence in any propriety or monetary sense.

A less threatening way to view such licence is as a critical component of intangible value. Integrated reporting is one of the emerging forms of corporate reporting that seeks to measure this. 

Credibility and legitimacy are common themes in the limited amount of literature that seeks to explain the social licence to operate. These are not new, and we have seen them in debates about trust in both corporations and those vested with management responsibility.

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As such, it is no surprise that in Australia and the UK, as elsewhere, those bodies responsible for keeping consonant corporate governance guidance have progressively placed higher regard on attributes of boards’, directors’ and managements’ role in setting and monitoring corporate culture.

As to the more strident criticisms, the proposal touches on deeper perennial questions around the purpose and interests served by corporations. A historical perspective is helpful here.

In 2005, the Australian Government’s principal agency for guiding corporate law reform, the Corporations and Markets Advisory Committee, concluded that the law allowed directors to consider factors external to shareholders’ interests as part of ensuring a company’s continued long-term wellbeing. In a soft-regulatory non-mandatory governance framework, it seems less remarkable that companies are urged to actively engage in dealing with wider stakeholder considerations and to acknowledge the pivotal role of corporate culture.

Similarly, in the context of the principle-based permissive nature of the Australia’s corporate law, it is all the more important that the governance framework recognises consensus developments afecting companies and markets.

In conclusion

The proposed changes to the CGP&Rs contain developments that may have been overlooked in the emotive debate about social licence to operate. These include important guidance on gender and others forms of diversity and dealing with climate change risk, along with increased stress being given to ensuring the validity of non-fnancial and emerging forms of corporate disclosure.

The CGP&Rs do not represent the sum total of the corporate governance architecture, with numerous other mechanisms coming to bear. These corporate governance mechanisms both overlap and interact. Moving forward, while many of the proposed changes have significant validity, the CGC will doubtless have the important task of both ensuring and communicating that its expanding list of 38 recommendations is in harmony with the corporate law and the complex architecture of corporate reporting.

Dr John Purcell FCPA is CPA Australia’s policy adviser for environmental, social and corporate governance.

CPA Australia’s policy team welcomes feedback and comments. Visit the policy pages for more details about our submissions, plus information about open consultations and the latest policy bulletins and newsletters.

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