Social Licence to Operate and Directors’ Duties – the Uncertainty of the Balancing Act

Julia Dreosti

A company’s social licence to operate, and its directors’ obligations to ensure that it is maintained, is one of the current hot corporate governance topics. In the wake of the recent media furore that has surrounded the Rio Tinto board’s decision to authorise the detonation of explosives in Juukan Gorge, a site of cultural significance,[1] the executive director of the Australasian Centre for Corporate Responsibility observed that: ‘[t]his [Rio Tinto] situation has demonstrated beyond doubt the importance of companies’ boards and executives protecting their social licence.[2]

However, attempts to date to formally incorporate a social licence to operate and associated concepts into Australian black letter law or even ‘soft law’, have been unsuccessful, notwithstanding the importance placed on culture and regard to the ‘bigger picture’ emphasised most recently in the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.[3]

Perhaps one of the challenges associated with incorporating this concept is the difficulty in properly defining its meaning. In this regard, it can be seen to be intrinsically linked to corporate social responsibility, which is more readily amenable to definition and measurement. Of these two related concepts, social licence to operate has been explained to be ‘a description of the legitimacy of a company and its permission or reception by society. In other words social licence to operate is the community’s response to corporate social responsibility or lack of corporate social responsibility.[4]

It should be noted that this definitional challenge is not insurmountable, and the concepts of corporate social responsibility and social licence to operate have found their way into the legislation of various other countries, including the United Kingdom,[5] United States[6] and Canada,[7] to name but a few.

Even its incorporation into ‘soft law’ has been resisted on a number of bases in Australia. Most recently, the Australian Securities Exchange (‘ASX’) Corporate Governance Council sought to introduce the concept of social licence to operate into the ASX Corporate Governance Principles and Recommendations (the ‘Principles’). The Principles apply to listed entities on an ‘if not, why not’ basis, (i.e. an entity is entitled to choose not to adopt one of the Principles, but it must explain why it has not done so).  In its Consultation Draft,[8] the Corporate Governance Council proposed that Principle 3 provide that:

a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner.[9]

The commentary accompanying the proposed revision further explained that:

A listed entity’s ’social licence to operate’ is one of its most valuable assets. That licence can be lost or seriously damaged if the entity or its officers or employees are perceived to have acted unlawfully, unethically or in a socially irresponsible manner.

Preserving an entity’s social licence to operate requires the board and management of a listed entity to have regard to the views and interests of a broader range of stakeholders than just its security holders, including employees, customers, suppliers, creditors, regulators, consumers, taxpayers and the local communities in which it operates. Long term and sustainable value creation is founded on the trust a listed entity has earned from these different stakeholders. Security holders understand this and expect boards and management to engage with these stakeholders and to be, and be seen to be, ‘good corporate citizens’.[10]

The proposed revision was met with vocal resistance from various industry groups, and was said to have been ‘unquestionably the most polarising issue addressed in the consultation feedback’.[11]

In addition to the arguments as to the ambiguity of the concept, and the difficulty of reconciling the views of different community groups that may have different values ‘that are not necessarily concerned with good corporate governance’,[12] it was also repeatedly asserted that its inclusion would create uncertainty for directors, and in particular, potentially cause a conflict with their legal obligation to exercise their powers and discharge their duties in good faith and in the best interests of the corporation at both common law and statute under s 181(1)(a) of the Corporations Act 2001 (Cth) (the ‘Corporations Act’).[13]

Ultimately, these objections prevailed, and the final form of Principle 3 provided that ‘a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly’.[14] The references to social licence to operate in the commentary were deleted.

As to the operation of s 181(1)(a) of the Corporations Act. The section provides that:

(1)     A director or other officer of a corporation must exercise their powers and discharge their duties:

        (a)     in good faith in the best interests of the corporation; …

The meaning of the phrase, ‘in the best interests of the corporation’, is not defined and is left open to interpretation by the company and its directors, and ultimately by the Courts.[15] Australian directors are left with a lack of certainty as to how best to exercise these powers and discharge their duties, with no guidance as to how to balance the concept of social licence to operate, with the existing principle of shareholder primacy, which ‘requires … a company to be run in such a way as to maximise the interests of the shareholders ahead of any other interested parties who might have claims against the company.[16]

Reform of s 181(1)(a) has been contemplated at least every five years in a raft of parliamentary enquiries,[17] and indirectly in the HIH and Banking Royal Commissions,[18] but the view has generally been expressed that the current language of s 181(1)(a) is sufficiently broad to encompass taking other stakeholder interests into account, whilst having sufficient regard to shareholder primacy.

But is it? And is that clear for directors and their advisors?

News reports indicate that the Rio Tinto board took legal advice before making its decision. However, that decision has since seen the departure of its CEO, and two other senior executives at the behest of disgruntled shareholders, who plainly expected something more than financial gain/shareholder primacy to be factored into the decision.

This is but one example of the raft of controversies in recent months in relation to issues such as sexual harassment in the workplace, the investigations in relation to Crown casino, and the corporate expenses scandal at AusPost … all of which occurred after Hayne published his Royal Commission Report – in which he strongly emphasised the importance of ‘culture’ – using the word no less than 300+ times in the Report.[19]

In the circumstances, it would appear that there is presently a disconnect between black letter law requirements of shareholder primacy and its application by the courts, with broader social and stakeholder expectations. The s 181(1)(a) legislation may indeed in theory be sufficiently broad to encompass both, but it provides no guidance to directors as to how to balance the two. In the current environment, and in the absence of even soft law guidance, the decision-making path for directors is fraught with uncertainty and requires careful guidance.

 

[1] Michelle Stanley and Kelly Gudgeon, ‘Pilbara mining blast confirmed to have destroyed 46,0000yo sites of “staggering” significance’, ABC News (Online, 26 May 2020) <https://www.abc.net.au/news/2020-05-26/rio-tinto-blast-destroys-area-with-ancient-aboriginal-heritage/12286652>.

[2] Melanie Burton, ‘Rio Tinto bows to pressure over cave blast as CEO, executives exist’, Thomson Reuters (Online Report, 16 September 2020) <https://www.reuters.com/article/us-rio-tinto-ceo/rio-tinto-ceo-to-depart-after-shareholders-demand-action-over-australia-cave-blast-idUSKBN2613O5>.

[3] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 1 February 2019).

[4] Rosemary Teele Langford, ‘Social Licence to Operate and Directors’ Duties: Is there a Need for Change?’ (2019) 37 Company & Securities Law Journal 200, 202.

[5] Companies Act 2006 (UK), s 172.

[6] 15 Pa Cons Stat § 1715 (1990).

[7] Canada Business Corporations Act, RSC 1985, c C-44, s 122(1.1).

[8] ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (Consultation Draft, 2 May 2018) 3.

[9] (emphasis added).

[10] ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (Consultation Draft, 2 May 2018) 25.

[11] ASX Governance Council, Corporate Governance Principles and Recommendations (Fourth Edition, 27 February 2019) 4.

[12] ASX Governance Council, Corporate Governance Principles and Recommendations (Fourth Edition, 27 February 2019) 4.

[13] Business Council of Australia, Submission to the Australian Securities Exchange, Consultation on the Fourth Edition of Corporate Governance Principles and Recommendations (3 August 2018).

[14] (emphasis added).

[15] LexisNexis, Ford, Austin & Ramsay’s Principles of Corporations Law (online at 2020) [8.070.3].

[16] (citations omitted). Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s “Enlightened Shareholder Value Approach”,’ (2011) 29 Sydney Law Review 577, 577-578.

[17] The Senate Standing Committee on Legal and Constitutional Affairs, Company Directors’ Duties Report on the Social and Fiduciary Duties and Obligations of Company Directors (Report, November 1989); Parliamentary Joint Committee on Corporations and Financial Services, Corporate Responsibility: Managing Risk and Creating Value (Report, June 2006); Corporations and Markets Advisory Committee, The Social Responsibility of Corporations (Report, December 2006).

[18] Royal Commission into the Failure of HIH Insurance (Final Report, April 2003); Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 1 February 2019).

[19] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 1 February 2019).

Share

Email | Linkedin | Print

Australia

Lipman Karas Pty Ltd
Level 23
25 Grenfell Street
Adelaide 5000
Australia
Visit us | Email us
Telephone: +61 8 8239 4600

Hong Kong

Lipman Karas
Level 23
Three Pacific Place
1 Queen's Road East
Hong Kong
Visit us | Email us
Telephone: +852 3761 3900

London

Lipman Karas LLP
Holborn Gate
26 Southampton Buildings
London WC2A 1AN
United Kingdom
Visit us | Email us
Telephone: +44 20 7400 2180
Back to top