Saturday, August 11, 2018  

JOHN SLATER                       

Large companies have no business dabbling in social issues. Doing so will only further undermine their trustworthiness.

Proposed changes to the ASX’s Corporate Governance Guidelines urging companies to preserve their “social licence to operate” is a recipe for bringing politics into the boardroom that will only further undermine public trust in corporate Australia. 


According to the draft guidelines,  preserving a public company’s “social licence to operate” entails “[having] regard to the views and interests of a broader range of stakeholders than just the entity’s security holders.” Stakeholders are defined expansively, including employees, customers, suppliers, creditors, regulators, consumers, taxpayers and the local communities in which the company operates. 


To the uninitiated, the idea that companies should take stock of how their actions affect the world around them is a no brainer. The problem is that what amounts to preserving a company’s social licence is a question on which reasonable minds can disagree.

Take the issue of  third world sweat shops – a perennial object of scorn of activists and NGOs around the world. Major Australian retailers like Target, Kmart, and Big W among plenty of others have come under scrutiny for their use of cheap labour factories in Bangladesh. 


If you take the word of Oxfam, sweatshops are exploitative and inherently immoral. On the other hand, there’s a plausible view held by scores of economists that if you really care about communities in developing nations blighted by poverty, so-called sweat shops should be encouraged.

The flimsiness of social licence as a concept is compounded by the fact that even within a particular subset of stakeholders, interests will often

Podcast August 11 - Nick Cater and Miranda Devone
00:00 / 00:00

diverge. Consider the proposed Carmichael coal mine in the north of the Galilee Basin in central Queensland. On one view, central Queensland towns nearby the proposed mine like Mackay suffering from high rates of unemployment and a sclerotic local economy are best served by economic development. On the contrary, others claim the environmental impact of the mine, particularly in relation to the Great Barrier Reef, will inflict lasting harms on communities within the region that outweigh any short-term bump to the business cycle. 


When you drill down to the detail, what satisfies a public company’s social licence is entirely in the eye of the beholder. And in practice, that beholder is almost always the board and management.


Blurring the lines between what’s legal, what’s profitable and what’s right in commercial decision-making isn’t a guarantee big companies will make the world a better place. It will, however, embolden boards and executives to further their forays into contentious social and political issues that have no relevance to their core business.  


A range of shareholder groups and industry super funds have thrown their support behind the ASX’s proposed changes. VicSuper and the Australian Council of Superannuation Investors have praised the proposed changes to the ASX’s guideline changes as timely”, given the declining trust in corporations due to recent examples of corporate misconduct.


In reality, they have it back to front. Taking sides on contentious issues that involve trade-offs between the environment, the perceived needs of social justice and shareholders – to whom corporate board’s owe their paramount duty – is guaranteed to alienate a sizeable portion of investors and the public. 


According to the Edelman Trust barometer – released in February this year, the Australian public overwhelmingly wants business to keep its nose out of public debate. Notably, the survey found only 20 per cent of respondents wanted CEOs to step in when the government doesn’t fix societal problems; 27 per cent thought CEOs should publicly support personal causes; and just 19 per cent wanted CEOs to teach the public about important social issues.


This contrasts with the percentage of people who want corporate leaders to focus on their traditional roles. So 62 per cent wanted CEOs to lead debate in matters related to their industry; 55 per cent said they wanted business to drive economic prosperity; and 53 per cent wanted businesses to ensure Australians have the skills to be globally competitive. 


These findings unequivocally show that public companies moonlighting as social activists is unlikely to allay public concerns about the integrity of corporate Australia. It also suggests that the ASX – itself a public company – has overstepped its mandate in trying to implant the notion of a social licence to operate into boardrooms around Australia. 


This is not to suggest business leaders have no role in public debate. But the weighty questions of how we make the world a better place are best decided in the cut and thrust of political debate, not by board rooms under the slippery guise of corporate social responsibility. 


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2019 by Menzies Research Centre