Gone are the days when a business license from the state was enough for a company to set up shop. Nowadays, businesses need more than legal and political permission. They also need a social license to operate.
Social license to operate refers to the level of acceptance or approval from local community and other stakeholders that is required to keep the business going. The term first arose during the 1990s in the resource extraction sector, but has expanded to other industries.
When crucial stakeholders or community members withdraw their support for a business project or development, social license to operate (SLO) evaporates. A company may experience this disapproval in the form of boycotts, sit-ins, and protests. Not exactly ideal conditions for operating a business!
Social license to operate at its best, and worst
There are many disastrous examples of social license to operate being lost. Shell in the Niger Delta, BP in the Gulf of Mexico, Dam building in Myanmar. Examples like these result in severe financial and reputational damage for a company. Clearly, maintaining SLO extends well beyond the realm of good public relations.
According to John Morrison, executive director of the Institute for Human Rights and Business, “Unlike public relations, companies cannot self-award a social license for their activities, rather they must earn it by involving others, including their competitors, communities and NGOs, in achieving levels of consensus that both reduce the risk of bad events and, when they do happen, also involve others in achieving adequate remedies.”
One example is the Kenyan mobile phone operator, Safaricom. After a 2008 election, the company’s network of bulk text messaging service was inadvertently used to spread hate speech that fueled ethnic violence and resulted in the deaths of over 1,000 people in the Rift Valley.
Rather than a cover-up or gloss-over PR campaign, the company worked hard in the period before the next election to develop careful protocols. These were designed to prevent hate speech, while at the same time allowing for freedom of expression. In the years since, the company has built up strong social license and is now one of the most popular and trusted companies in Kenya.
The Gap Inc.
Another example is from the U.S. clothing and accessories retailer, The Gap.
In the late 1990s The Gap faced harsh criticism for its sourcing activities and allegations of child labor abuses in Cambodia. Throughout the early 2000s, The Gap engaged in multi-stakeholder efforts to recover from the scandal. They set prohibitions on child and forced labor, hired nearly one hundred inspectors to monitor overseas vendors, and pulled over 10,000 garments from its supply chain to ensure it wasn’t selling products produced in sweatshops. It became apparent to stakeholders that the company was doing as much, if not more, than competitors.
To this day, the company continues to work with government, trade unions, and other independent organizations to put an end to the use of child and forced labor.
Build and protect social license to operate
We’ve written before about child labor in global supply chains and how it undermines sustainability. Companies embroiled in scandals for human rights abuses in their supply chains are, many years later, still trying to clean up the mess and repair the damage. Fortunately, this can be avoided.
Achieving and maintaining SLO takes an unwavering commitment to ethical business practices. It involves building relationships that enhance social legitimacy, credibility, and trust in the eyes of stakeholders.
Social license to operate is at the heart of sustainability’s inter-related environmental, social, and economic systems. It places business operations in a larger systems-based context. It is an important concept in support of meaningful stakeholder engagement for mutual benefit and long-term business viability.