‘Doing the Job That’s Required?’: Social License to Operate and Directors’ Duties 

By | December 27, 2022

The concept of social license to operate (SLO) is becoming increasingly important as a de-facto corporate regulatory device, with implications for how company directors discharge their duties. While an agreed definition of SLO is hard to identify, at its broadest, SLO might be described as the public’s expectation that businesses will ‘do the right thing.’ This expectation translates into a growing need for directors to understand their impacts on the environment and communities in which they operate. Despite this pressure, little is known about how directors navigate social license issues in the boardroom. In our recent article, we draw on qualitative insights into the perspectives of Australian company directors on social licenses in the context of their directors’ duties.

SLO became a focus for Australian directors in 2018 when the Australian Securities Exchange (‘ASX’) released a proposal to integrate SLO reporting obligations in a revised edition of its widely-respected ASX Corporate Governance Principles (‘Principles’). Significant controversy accompanied this proposal on a range of grounds. High-profile commentary pointed to the potential difficulty directors would face in attempting to respond to SLO-based requirements when the concept itself was ill-defined. An agreed description of SLO is problematic and continues to be so despite a significant increase in the use of the term in recent years. After being coined at a World Bank meeting in 1997 and being used originally in mining discourse, SLO has expanded into an ever-widening range of contexts. Indeed one reason for SLO’s lack of definitional clarity is the rate with which the term has evolved and spread across domains, and after more than two decades of academic attention, the phrase has so far defied a comprehensive definition. Another cause of SLO’s definitional challenges appears to have been its capacity to evolve to reflect changing relationships between corporations and society. The dynamic nature of SLO is particularly relevant for directors in their attempts to discharge the duties they owe companies, introducing as it does an evolving and nuanced group of considerations tied to reputation, purpose, and acceptance.

Given this lack of definitional clarity and the controversy accompanying the ASX’s proposals, the suggested revision was dropped. However, notwithstanding the ultimate removal of SLO references from the ASX’s revision, the concept, and connected ideas have echoes in the final version of the Principles released by the ASX, confirming their continuing regulatory significance. The regulatory words chosen by the ASX were ultimately ‘reputation’ and ‘standing in the community,’ concepts the ASX regarded as ‘essentially synonymous’ with SLO. The use of the word ‘reputation’ was particularly significant in light of judicial authority now available in Australia to demonstrate the importance of reputation to Australian directors’ statutory duty of care.

Overall, given the growing significance of SLO, the importance of reputation to contemporary corporations, and the fact that directors hold the central responsibility for oversight of SLO decision-making in corporations, there is a clear need to understand something of directors’ thinking on this important topic. There has, however, been a dearth of research on directors’ perceptions of SLO both within Australia and internationally. Our paper does original work in drawing on rare qualitative data to analyze directors’ SLO perceptions in light of their legal obligations. The study was undertaken in late 2019 and early 2020 with 24 respondents and used in-depth semi-structured interviews to investigate participants’ perceptions of SLO and related concepts. As part of a larger project, respondents were asked how directors perceived the connection between their legal duties and SLO.

The views of directors described in our paper offer valuable insights into the operation of the Australian directors’ duty of care and best interests duty in contemporary corporate practice. The data reveals that SLO and related concepts are highly relevant to current director activity. They also confirm that directors’ perceptions are consistent with an evolving legal framework adapting to absorb the increasing significance of SLO and related reputational factors. Indeed, most directors saw SLO-related concepts as intrinsic to normal business operations. In the words of one director:

social license is every day . . . it’s business as usual, it has to be. It’s in everything.’

The data also make clear the complexity of the associated decision-making. It was apparent from the responses that a broad range of factors was relevant in any SLO-related judgment. Issues ranged from considering the timeframe over which a decision would play out to the potential importance of distinguishing between consumer-facing organizations and business-to-business entities. The significance of geographical SLO factors for corporate activities with a physical footprint was also identified (for instance, a construction company is more likely to need social approval from local community members than a business with only a virtual presence). Reputation was a particularly important aspect of directors’ duties, SLO, and related concepts.

Directors also drew attention to their perspective that considering all the impacts of board decisions was simply part of what they did as directors since a range of stakeholders would always be relevant to any decision and would be interrelated. One director made the colorful observation:

I’ve never sat there and gone, oh, should we screw our employees or should we make more money? Mmm. Those decisions just don’t come up.’

 Another very experienced director explained their thinking in this way:

as a company director, your obligation is to act in the best interests of the company, and in doing so, you take into account all the different factors there, and all of your decisions, you are weighing up all the different stakeholders and the different factors, and that’s where this concept of social license comes in.’

Indeed this ‘weighing up’ idea was identified by this director as a key component of the practical application of directors’ duties:

‘I think that “in the best interests of the company” serves us well, because you do have to weigh different things up . . . based on what you know at that point in time.’

The concept of weighing up competing interests often leads to an assertion that any potential tensions between shareholder and stakeholder interests tend to ‘eventually’ align. However, one director in the study specifically rejected this argument, asserting ‘that’s just not true. You do have to make deliberate preferential decisions around your different constituents.’ This view highlights the complexity of SLO issues for boards, reinforced by others’ emphasis on ‘balancing’ and ‘weighing’ activities in the boardroom.

It is also worth noting that some directors were unhappy about potential limits being placed on their discretion through any form of absolute obligation to comply with the relatively undefined concept of SLO. Indeed, despite many participants affirming the concept’s relevance, there was no clear consensus on the definition of SLO, with some respondents viewing it as too imprecise and too subjective to operate as an externally imposed regulatory requirement. Even for those directors who were comfortable working with SLO concepts in their director practice, there was agreement that SLO concepts are complex, nuanced, and highly situational. Pointing to the relevance of the best interests duty, in particular, directors affirmed the key relevance of a bottom-line requirement that the promotion of stakeholder interests did not occur without a link to corporate benefit.

Overall, SLO concepts have become an intrinsic component of the suite of factors to which contemporary directors must, and do, have regard in discharging their duties. Many directors in this study appeared accepting of the need to engage in SLO-related decision-making. As discussed, however, these judgments may be difficult to make. In addition, many directors noted that the consequences of reputational damage could be sudden and very significant. A range of high-profile examples of this point has been observed in Australia recently, and similar evidence is undoubtedly available worldwide.

Perhaps the highly discretionary nature of SLO-related decision-making, its focus on (to quote one director in the study) ‘things that are in the grey’ made it a controversial choice for inclusion in the ASX’s proposed Corporate Governance Principles. Nonetheless, directors seem largely clear that while SLO decisions may be difficult, they are a matter of ‘doing the job that’s required of you.’ In offering a doctrinal and empirical analysis of the current relationship between directors’ duties in Australia and SLO, our article elucidates the increasing relevance of SLO for contemporary director practice.

Vivienne Brand is an Associate Professor at the College of Business, Government, and Law of Flinders University.

Rosemary Langford is a Professor at the Melbourne Law School of the University of Melbourne and the Acting Director of the Centre for Corporate Law.

This post was adapted from their paper, “‘Doing the Job That’s Required?’: Social Licence to Operate and Directors Duties,” available on SSRN and published in the Sydney Law Review. The main study from which the data were drawn is reported more fully here: Brand, V, Lacey, J, & Tutton, J, (2023) ‘Social Licence as a Regulatory Concept: An Empirical Study of Australian Company Directors’ published in the University of New South Wales Law Journal.

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