Whether you like ‘social licence’ or not, social risks are real

Key Points

• The current debate on ‘social licence’ and the ASX Guidelines obscures a deeper issue – shifting societal expectations create risks that companies and boards cannot ignore
• Boards know these risks are real, but are less clear on how to anticipate, understand and manage them
• A more perceptive analysis of known risks, and the use of new technology like AI to sense emerging risks, helps protect Boards and their companies from unexpected reputational crises

A deeper issue

We’re seeing a lively debate in the business pages about whether the concept of ‘social licence’ should be included in the ASX Corporate Governance Guidelines. There is a danger this debate will obscure a deeper issue – societal expectations of business are shifting, potentially putting hard earned corporate and individual reputations at risk.  

Whether you are for or against social licence, there is no getting away from reality – community distrust and anger can have significant consequences for companies. Many Boards are deeply concerned about the political, regulatory and reputational costs of attracting community outrage. After a decade in the resources sector, and another in the finance sector, I understand why.

For some, the concept of a social licence is a powerful way to understand how a company should relate to the communities within which it operates. For others, social licence is a dangerous concept, suggesting an ill-defined community, and self-appointed representatives, should be able to direct how a company manages its business.

Social risk realities

There is another way to think about these issues, one that doesn’t raise the conceptual issues some find with the social licence approach. This is to consider a company’s ‘social risk’ – the risk that arises when a company is, or is seen to be, out of alignment with the expectations of society. Where it differs is that it is an entirely pragmatic approach, one that doesn’t need to concern itself with the rights or wrongs of a company’s engagement with society. Social risk either exists, or it doesn’t. And it exists regardless of your personal philosophy or outlook on life.

Social risk can be the consequence of more traditional forms of risk. If a bank’s payment system fails, it has experienced an operational risk. But it will also experience a social risk if large numbers of people do not receive their salary when they expect it. The difference between the operational risk and the social risk is that fixing the former is not enough to fix the latter. People will still be angry and demanding action against you, and trust will be damaged, even though you have rectified the fault. This is social risk.

Social risk also arises in its own right. AFL clubs experience this when they position themselves as family oriented, while operating major poker machine venues that many see as destructive of families. It is because of this social risk – this misalignment with the community – that we are seeing some clubs moving out of pokies, regardless of their profitability or legality.

Critics of social licence may argue that many of the ‘flaws’ in social licence apply to social risk. Who is this society we need to align with? Neither the social licence nor social risk approaches argue there is a single homogenous society with a clear standard to which business must conform. Society is made up of many individuals, groups and communities, often with shifting, even conflicting, expectations. It is messy. For social risk, all that matters is the level of risk involved. Is community distrust likely to result in negative headlines, or force (or encourage) politicians to pillory the company? Will regulators become more intrusive?

Taking practical steps

There are practical steps boards can take to anticipate, understand and manage their social risk. Conceptually, these steps are little different from how companies approach traditional risk management but applied in an innovative way. Blackhall & Pearl uses social risk analytics to help boards and management gain deeper insights from what is already know. Artificial intelligence, machine learning and sentiment analysis provide our social risk sensing tools, which act as a radar for how societal expectations are shifting, and where social risk may emerge. 

Regardless of whether you are for, against or indifferent to the social licence argument, there are strong arguments for getting on top of your social risk exposure.

Steven Münchenberg | Managing Partner | Blackhall & Pearl | [email protected] +61 (0)418 597 917