From Blind Eye to Watchful Eyes Everywhere: Social License to Operate
by Matt, on 14 Nov 2019
To succeed in business today requires much more than just making a profit. From a very early stage, how you run your business becomes just as important as whether it makes any money. In the developed world, environmental, health and safety, social, and ethical concerns are evolving into regulatory frameworks within which every company is expected to operate.
While some businesses require a literal license to operate (LTO) – procured from local, regional, or national authorities upon demonstrating a qualifying level of competence and compliance – every business must now earn and maintain a social license to operate, or face extinction.
In this edition of SPT, we offer some thoughts on this developing story. While many countries, jurisdictions, and companies are playing catch-up, the trajectory is clear: social LTO will play an increasingly significant role in investors’ and customers’ choices as to which companies will earn their trust and business.
IT’S AN ACRONYM
Here’s a crib sheet on some relevant acronyms:
ABA Anti-Bribery Act – legislation enacted in the United Kingdom that, alongside the United States’ FCPA (see below), is recognized as a benchmark for anti-corruption regulation.
ESG Environmental, Social, Governance – currently the most prevalent abbreviation being used by investors and other stakeholders when evaluating the sustainability of a company’s business practices.
DPA Data Protection Act - the United Kingdom’s implementation of GDPR, under which anyone responsible for using personal data has to follow strict data protection principles. These require the information be used fairly, lawfully and transparently for specified purposes, and in a way that is relevant and limited to only what is necessary. It also requires information be kept up to date, only kept for as long as necessary, and stored in a way that protects against unlawful access or loss.
FCPA Foreign Corrupt Practices Act – the United States’ equivalent to the United Kingdom’s ABA (see above), which sets stringent requirements for company leaders to assure that any international business they conduct is won and performed in an ethical manner.
GDPR General Data Protection Regulation – the reigning 900-pound gorilla of data protection legislation, enacted by the European Union to protect any personal information your company handles belonging to employees and customers who are EU residents. Note that there is no single data protection legislation in the United States - just a jumble of federal and state laws of varying effectiveness.
HSES Health, Safety, Environment, Security – the longest-standing element of LTO, which some prefer to write as ‘SHE’ or ‘EHS’, to which security is a relatively recent addition, setting expectations for working conditions and impact on the environment in which a company operates.
LTO License to Operate – the literal or social permission granted to a business by an authority or stakeholder that allows it to continue earning their trust and business.
HOW TO EARN AND KEEP A LICENSE
When we hear LTO, we think of demonstrating to your stakeholders’ satisfaction that the business practices and operating procedures you follow are acceptable. This is much broader than the traditional sense of stakeholder engagement.
In this context, your stakeholders necessarily include your employees, your shareholders (if you have them), and the general public.
Strictly speaking, we should be calling this your Social LTO to differentiate it from any regulatory licenses your business might require from local, state, or federal authorities. We’ll assume that obtaining and maintaining those licenses is something you’ve got under control.
Social LTO has become a lot more significant in recent years. Public scrutiny and investor selectivity are making it increasingly important to have auditible processes in place that demonstrate compliance and continuous improvement.
However, there’s no exam to take or laminated ID card to carry. You and your company automatically qualify for a provisional license to operate just by virtue of going into business.
This means you’re on probation from Day One. The longer you operate without giving your stakeholders any cause for concern, the more established your LTO will become.
There’s no rule to say when you can drop the ‘provisional’, either. Some might say it never goes away. Others more helpfully suggest that it drops once you have successfully navigated a difficult situation that could have cost you the LTO.
Such situations are unfortunately impossible to avoid. Someone inside or outside your organization will fall prey to the temptations of greed, laziness, or complacency and do something that falls short of your stakeholders’ legal, social, or ethical standards. How you respond will determine whether you lose, cling on to, or strengthen your social LTO (and, in certain cases, your literal LTO as well).
GO TO JAIL, DO NOT PASS GO
The most egregious breeches in LTO are those where a law gets broken. There are obviously many possible scenarios where this could be the case (no pun intended), ranging from a relatively minor infringement of state law to a full-on violation of international law. Any way you look at it though, they’re worth avoiding.
An important feature in many of these situations is that the CEO goes to jail as well as whichever employee(s) perpetrated the crime. It’s on you to demonstrate that you did everything possible to prevent it from happening.
How is this possible? Well, you’re responsible for establishing rules and processes to govern how your staff (and your contractors) conduct themselves, for training them on those rules and processes, and for auditing their understanding and compliance.
If you can demonstrate to the judge that all those things were done to the best of your ability, you might escape with a get-out-of-jail-free card.
Key areas for compliance that carry the greatest risk of large fines and jail time are anti-corruption (ABA, FCPA) and data protection (DPA, GDPR). You should seek specialist help to determine your company’s exposure to these risks, processes to implement, training and audits to conduct, and best practices for managing and documenting your efforts.
SEND EVERYONE HOME THE WAY THEY CAME
In the developed world it is thankfully no longer acceptable to knowingly expose our fellow humans to dangerous working conditions. Whether hazardous to their immediate (safety) or longer-term (health) wellbeing, it’s compulsory to evaluate the risks associated with performing each job and to mitigate them with best available measures.
Companies that routinely send their employees to the hospital – or, worse still, the morgue – are publicly named and shamed, and lose access to qualified workers.
Whatever line of business you’re in, don’t be one of those companies. Make your employees’ health and safety a priority and send them home to their family in as good – if not even better – shape than when they came to work.
Even better shape? Why not? Providing your staff with medical insurance, access to healthy snacks, ergonomic desks and chairs, or a gym facility are all great ways of promoting a healthier and safer lifestyle. And, some of those behaviors will carry over to your employees’ time outside work, magnifying the impact of your efforts.
LOOK AFTER THE PLACE
While the “H” and “S” elements are fairly well accepted across industry, the degree to which companies exercise environmental stewardship still varies.
Without getting embroiled in the climate change debate (although we question why it’s even still a debate…), there’s no doubt in our mind that stakeholders’ expectations for a company’s environmental performance, the level of scrutiny they apply, and the fullness and transparency of self-reporting they demand will all continue to increase.
In fact, unless it would somehow render you uncompetitive, we highly recommend positioning your business as exercising superior environmental stewardship.
But, only do so if you’re willing to follow through. Companies that claim to be leaders in H, S, or E behaviors and performance but can’t back it up with real results are shooting themselves in the foot and risk seriously damaging their social LTO.
Set your company some real, impactful sustainability goals, establish baseline values, and then measure and report your performance. It doesn’t have to be spectacular to be meaningful, and even reporting where you’re falling short will boost your credibility with stakeholders.
Over the last couple of years, purposeful investing has disrupted the financial community. Beginning with the public markets and now extending to private equity and venture capital, this trend toward filtering investment opportunities according to their social and ethical profile is gaining a lot of momentum.
The popular term coined by this movement is “ESG” – standing for environmental, social, and governance. Investors expect capital-seeking companies (and funds) to have strategies and processes in place to measure and improve their performance in each of these areas.
We’ve already touched on environmental stewardship earlier in this post, so let’s briefly talk about the social and governance aspects.
A company’s social impact can be measured in many different ways, depending on the type of business and how it operates.
Large organizations with multiple locations can have a significant societal impact through local community outreach, donations to local non-profit organizations, and staff participation in not-for-profit activities.
Smaller companies can still help their employees make an impact – for example, by matching charitable contributions, organizing staff participation in community projects (e.g. Habitat for Humanity), or encouraging them to use company time and resources while volunteering for community-focused organizations.
Governance is a rather dry subject but no less important. It deals with such controversial subjects as tax avoidance, executive pay, corruption, diversity, director nominations, and cyber security.
One of the easiest improvements in governance that many small businesses can make is to separate the CEO’s responsibilities from those of the board – especially the chairman of the board.
This creates an environment in which the board can hold company leaders accountable for their actions and set ESG performance targets that impact corporate compensation. It also reduces the potential for autocratic decision making, nepotism, and other shady corporate behaviors.
Diversity of all types is something in which we believe very strongly. It’s an elixir for innovation and progress. And, as a startup or early-stage business, you’re in the perfect position to ensure diversity is built into your organization from the ground up. If you truly open your mind to employing and working with anyone who is qualified, diversity will happen without you having to force it.
SEE THE VALUE NOT JUST THE BURDEN
You can be forgiven for reading this post and thinking work, work, and more work. Your plate is already filled with product development, marketing, sales, and operational issues so adding a half-dozen new things to worry about isn’t welcome.
In reality, most of the issues we’ve covered are things you ought to be doing anyway if you want to run an efficient, effective, creative, market-leading business. Which, of course, you do.
There’s ample evidence that top-quartile health and safety performance correlates strongly with productivity and its close cousin, product (or service) quality.
Taking this point to its logical conclusion, there’s positive business value to be gained by investing your time in LTO issues. The stronger your company’s performance in these areas, the easier it will be for you to attract talent, raise funds, and win customers’ business.
Investors are getting smarter about valuing social LTO performance – rather than just penalizing companies whose compliance procedures aren’t getting straight A’s.
As we already mentioned, ESG strategy and reporting is attracting particular focus as investors distance themselves from less-savory business sectors and practices. So, proactively evaluating your company’s ESG position and opportunities for improvement could help separate you from the less well prepared.
- Review the strategies, processes, training, assurance, and reporting you have in place for each of the LTO areas we’ve discussed.
- Create a prioritized list of areas for improvement with target dates and owners within your organization.
- Pay immediate attention to any areas where legal compliance might be in doubt, or that could threaten your social license to operate if they were to reach a stakeholder’s attention.
- Consider which areas might be of greatest interest or importance to current and future stakeholders and how you can derive strategic business value by focusing your improvement efforts on those issues.
- Prepare and publish a report explaining your self-evaluation and action plan to your stakeholders. Commit to regular – for example, quarterly – progress reviews and update your reporting accordingly.
- As other companies in your industry or sector begin to publish similar reports, attempt to benchmark your company’s performance against its competitors. Highlight areas of leadership and deficiency in your reports to stakeholders.
- Read about other fundamentals of growing and scaling your business.