What Is Social License to Operate?
Social license to operate (SLO) refers to the ongoing acceptance and approval of a company's operations by its stakeholders, including local communities, employees, customers, investors, and regulatory bodies. Unlike a legal permit, which is granted by a government authority, a social license is an informal, unwritten, and dynamic agreement based on trust and credibility. It falls under the broader umbrella of corporate governance and sustainability, reflecting how well an organization manages its relationships with the public and its impact on society. The concept implies that for a business to maintain its operations and achieve its objectives, it must actively earn and retain the consent of the communities and society in which it operates.14
Gaining and maintaining a social license to operate is crucial for a company's long-term viability, as a lack of public acceptance can lead to significant disruptions, legal challenges, and damage to a company's brand equity. It emphasizes the importance of going beyond mere regulatory compliance to build genuine relationships and address societal concerns. Companies that prioritize their social license tend to foster better community relations and enhance their overall public perception.
History and Origin
The concept of the social license to operate emerged prominently in the 1990s, particularly within the extractive industries such as mining and forestry.11, 12, 13 Companies in these sectors often operated in remote areas, directly impacting local communities and the environment. While they held legal permits, they frequently encountered strong community opposition, leading to project delays, increased costs, and reputational damage.10
W. Henson Moore, then President of the American Forest and Paper Association, is often credited with one of the earliest published uses of the phrase in 1996, advocating for proactive environmental policies to earn public trust.9 Subsequently, the term gained significant traction as a way to describe the informal approval needed beyond formal permits. This informal approval was recognized as essential for avoiding costly conflicts and mitigating reputation risk.8 The World Economic Forum, among other global organizations, has highlighted the evolving environment in which businesses operate, noting that a company's "license to operate" is increasingly granted by citizens through their governments, and is at risk if a new conception of business duties isn't adopted for the 21st century.7
Key Takeaways
- Social license to operate (SLO) is the informal, ongoing acceptance of a company's activities by its stakeholders and society.
- It is distinct from legal permits and is earned through trust, transparency, and effective stakeholder engagement.
- Originally prominent in extractive industries, the concept now applies across diverse sectors.
- Loss of social license can lead to significant financial, operational, and reputational consequences for a company.
- Maintaining SLO is crucial for a company's long-term value creation and overall sustainability.
Interpreting the Social License to Operate
Interpreting a company's social license to operate involves assessing the level of trust and acceptance it enjoys among its stakeholders. It is not a quantifiable metric with a single formula, but rather a qualitative assessment of stakeholder sentiment, behavior, and ongoing relationships. A strong social license indicates that a company is perceived as a responsible and legitimate actor, contributing positively to society and operating in alignment with community values. Conversely, a weak or eroding social license signals distrust, dissatisfaction, or outright opposition, often manifested through protests, boycotts, or increased regulatory scrutiny.
Companies interpret their social license through various means, including formal and informal dialogue with local communities, surveys, media monitoring, and feedback from non-governmental organizations (NGOs). A positive social license can reduce risk management challenges, foster an environment conducive to business growth, and potentially enhance a company's market capitalization by appealing to ethical investors. When a company fails to maintain its social license, it may face project delays, increased operating costs, and difficulties attracting or retaining talent.
Hypothetical Example
Consider "GreenBuild Inc.," a construction company planning to develop a large residential complex near a sensitive wetland area. GreenBuild has all the necessary legal permits from the local government. However, the proposed development raises concerns among environmental groups and local residents about potential ecological damage and increased traffic.
To secure its social license to operate, GreenBuild Inc. engages in extensive community dialogue. They host public forums, invite local environmental experts to review their plans, and establish a clear grievance mechanism for residents. Instead of merely building, they propose to allocate significant funds to create a protected nature reserve bordering the wetland, develop new cycling paths for the community, and commit to hiring a substantial portion of their workforce from the local area. By demonstrating a genuine commitment to addressing community concerns and offering tangible benefits beyond their core project, GreenBuild slowly builds trust. Although some initial opposition remains, the majority of the community and key stakeholder engagement groups express support, granting GreenBuild the informal acceptance needed to proceed smoothly. This proactive approach helps them avoid protests, legal challenges, and ensures a more harmonious development process, securing their social license to operate alongside their legal one.
Practical Applications
The concept of social license to operate has practical applications across various industries, extending beyond its origins in extractive sectors. For businesses, earning and maintaining a social license is critical for sustained operations and includes fostering positive relations with diverse groups. For instance, in the mining sector, obtaining community approval is as vital as legal permits for operations to proceed without conflict.5, 6 The International Council on Mining and Metals (ICMM) provides guidance on how companies can manage community relations and integrate human rights considerations into their operations, underscoring the importance of ethical engagement to secure and retain social license.4
Furthermore, the emphasis on Environmental, Social, and Governance (ESG) factors in investing and corporate strategy has broadened the relevance of social license. Investors increasingly consider a company's social performance as an indicator of its resilience and future profitability. A strong social license can reduce unforeseen liabilities and enhance shareholder value. As highlighted by Reuters, the growing focus on ESG criteria is fueling demand for companies to secure and maintain their social license to operate, as stakeholders, including investors, increasingly scrutinize how businesses manage their social impacts.3
Limitations and Criticisms
Despite its growing importance, the social license to operate concept faces several limitations and criticisms. One primary challenge is its informal and intangible nature; unlike a legal license, it is not issued by a single authority, making it difficult to define, measure, or quantify precisely.2 This inherent vagueness can lead to ambiguity regarding who grants the social license, what constitutes its full attainment, and how its terms might evolve over time.
Critics also point out that the social license can be fragile and impermanent. It must be continuously earned and can be revoked swiftly due to perceived breaches of trust, environmental incidents, or shifts in public perception. What might be accepted in one community or at one point in time may not be elsewhere or in the future. Moreover, the power dynamics involved can be complex; while the concept implies a bottom-up approval from communities, in practice, it can sometimes be viewed as a tool for companies to manage dissent rather than genuinely empower stakeholders. A 2020 article published on the Harvard Law School Forum on Corporate Governance discusses the difficulties companies face in measuring and managing the social license, emphasizing its dynamic and often subjective nature.1 This highlights the ongoing challenge for companies to ensure their strategic planning aligns with societal expectations that are constantly shifting.
Social License to Operate vs. Corporate Social Responsibility
While both the social license to operate (SLO) and Corporate Social Responsibility (CSR) relate to a company's relationship with society, they represent distinct concepts. CSR is typically a company's self-defined commitment to operate ethically and contribute to economic development while improving the quality of life for its workforce, their families, and the local community. It often involves voluntary initiatives, philanthropic efforts, and sustainable practices that demonstrate a company's commitment to social good. CSR is about what a company does to be a good corporate citizen.
In contrast, the social license to operate is what a company needs from its stakeholders to continue its operations. It is an ongoing, dynamic acceptance granted by communities and the broader public, often implicitly. While CSR activities can contribute significantly to building and maintaining a social license by fostering goodwill and trust, they are not the social license itself. A company might have extensive CSR programs, but if its core operations are perceived negatively by a key community, it can still lose its social license. Therefore, CSR is often seen as a means to help achieve or maintain SLO, rather than being synonymous with it. The former focuses on a company's internal policies and external good deeds, while the latter reflects the external community's permission for a company to exist and operate.
FAQs
How does a company obtain a social license to operate?
A company obtains a social license to operate by consistently demonstrating ethical behavior, transparency, and a genuine commitment to the well-being of the communities and environment where it operates. This involves proactive stakeholder engagement, listening to concerns, mitigating negative impacts, and sharing benefits fairly. It's an ongoing process of building and maintaining trust.
Is social license to operate a legal requirement?
No, the social license to operate is not a legal requirement or a formal permit issued by any government authority. It is an informal, unwritten, and often implicit acceptance granted by society and local communities based on their perception of a company's legitimacy and ethical conduct. Legal compliance is a prerequisite, but SLO goes beyond it.
What happens if a company loses its social license to operate?
If a company loses its social license to operate, it can face significant negative consequences. These may include public protests, boycotts of its products or services, increased regulatory scrutiny, project delays or cancellations, difficulties in obtaining future permits, damage to its reputation risk, and ultimately, financial losses. Rebuilding a lost social license can be a lengthy and costly process.
How is social license to operate measured?
Measuring social license to operate is complex because it is intangible. Companies often rely on qualitative indicators such as community sentiment surveys, media analysis, direct feedback from local groups, the absence of public opposition, and the strength of community relations. It's a continuous assessment of how a company is perceived by its key stakeholders.
Can social license to operate apply to all industries?
While the concept originated in the extractive industries (like mining), the principles of social license to operate are increasingly relevant across nearly all sectors. Any company that impacts communities, the environment, or relies on public trust—from technology firms to financial institutions and consumer goods companies—can benefit from cultivating a strong social license. It reflects a broader shift towards more ethical investing and corporate accountability.