Business risk and stakeholder conflict: Why a social licence approach makes business sense

Authors Katherine Teh-White and Piers Gillespie are consultants from Futureye specialising in social licence to operate strategy, governance and execution.

While some companies in the extractive industries have developed policies for sustainable development, what many companies fail to incorporate is embedding sound approaches to social risk in all its operations.

In an article, entitled “Conflict translates environmental and social risk into business costs”, the author outlines how communities and stakeholders perceive and understand risk differently than companies, and how this perception affects corporate business risk, creates additional, avoidable costs, and increases financial liabilities.[1]

The article argues that understanding and having a process that honestly respects the opinions of others as part of running a business is key. As part of the research, the authors noted cases where a failure to engage properly with social issues and foresee and manage conflict meant:

  • a major, world-class mining project with capital expenditure of between $US3–$US5 billion suffered roughly $US20 million per week of delayed production in net present value;
  • Publicly reported financial data of a Latin American mine, at which a nine-month delay during construction in 2010 resulted in $US750 million in additional project costs;
  • One interviewee revealed that company–community conflict in one country cost one project US$100 million per year in stoppages;
  • Another documented a community conflict that shut down a few power lines that caused an entire operation to halt at a cost of $US750,000 per day, whilst another seven-day blockage of an energy project’s supply route in a Middle Eastern country cost $US20,000 per day;
  • In Australia, Credit Suisse has applied a 2.9 per cent discount on its corporate valuation of AGL Energy (AGK) to account for the risk of regulatory approval delays following local community opposition to hydraulic fracturing at their planned Gloucester coal-seam gas project;
  • An economy wide valuation of “environmental, social and governance risks” across the Australian Stock Market in 2012 by Credit Suisse identified $21.4 billion in negative share-price valuation impact;
  • In 2014, Anglo American confirmed that the need to redesign its Quellaveco project in the face of conflict in Southern Peru had increased the estimated cost of the project from $US3.3 billion to $US5 billion.

The article also explained how a separate study of 19 publicly traded junior gold-mining companies found that two-thirds of the market capitalisation of these firms was a function of the firm’s stakeholder engagement practices, whereas only one-third was a function of the value of the gold in the ground.

These examples provide evidence of how environmental and social risk translates via conflict into business risks and additional costs. Conflict is defined as the coexistence of aspirations that cannot automatically be met simultaneously, ranging from low level tension through to violence.

Futureye has seen this time and time again working in the field of business risk planning and mitigation, social licence, and with the misunderstood process of ‘managing’ stakeholders.

We have seen this in mining and agriculture companies, with infrastructure projects, in the palm oil industry, with chemical companies, wind and energy farms, and regularly with government projects. The figure below demonstrates the five new forces for change on modern businesses.

The extractives industry is not alone in failing to manage social risk. The same applies for Consumer Goods companies, where despite 97 per cent of CEOs believing sustainability should be integrated into a company’s operations and strategies, only 59 per cent believe it has been implemented into their supply chains.[2]

There is a reason for this. A social licence mindset is not about incorporating some nice-sounding corporate messaging into marketing communications. Such an approach is foolhardy and patronising: we know that tokenistic corporate messaging about concern and listening makes stakeholders more motivated to vehemently oppose a business’s operations. Instead, the sustainable business goal should be a resilient social licence, which can only happen if there is a social licence mindset.

For all of us, a social licence mindset takes learning and practice, investment and commitment.

The article explains that companies consistently undervalue the cost of community and stakeholder conflict because companies fail to properly understand the social and emotional drivers of their key stakeholders. It notes that:

“Companies often endlessly talk about managing stakeholders, as if it is a separate department unto itself, as if by doing this means there is no need to really understand the point of view of those ambivalent or opposed to a business. Such people are dismissed as negative, or overly critical, or self-seeking (who isn’t?), when it is these people if they are engaged properly, could insure better business relations, reduce running costs, and minimise the potential for business to face crises in the future.”

Three additional findings were found in the research. The first was that the most common underlying issues that influenced relationships are social and economic in character, and most often linked to environmental concerns.

A second finding is that the feasibility and construction stages of projects are overrepresented in the proportion of conflicts that led to the suspension and abandonment of projects. A third finding is that mining company–community conflict tended to escalate from campaigns and procedural actions (such as complaints made to governments, companies, tribunals, or courts) through to actual physical protest.

The third finding reveals that opportunities regularly exist for dialogue to address issues before escalation. Nonetheless, a considerable proportion of the cases studied demonstrated escalated forms of conflict over a longer period.

This suggests that if CEOs and sustainability managers were more attune to social licence and conflict resolution methods, the opportunity to turn potential and latent conflict into better business relations is clearly there.

In addition to risk, perceived risk, however illogical it may be from a company’s point of view, always motivates conflict. This includes the failure of companies to respond properly to expressed concerns about risk; company engineers dismissing community perceptions of risk as “unfounded” and “unscientific”; the presence of organisations that heighten perceptions of risk for their own benefit; and the failure of government to mediate these different perceptions of risk in ways deemed to be impartial.

To better manage the link between risk and conflict, a new approach that has social licence and outrage mitigation at its core is key. Part of this is acknowledging the potential cost of conflict into a pragmatic business case that can change corporate strategy, despite this often being difficult to do.

Developing a business social licence mindset also requires individuals within organisations who can be trained to work across functional, organisational, and conceptual boundaries, and who can work in more than one “language” and interpret how social and environmental risk is translating into costs for business.

The ability to converse in technical and social science languages is also identified as important for employees in technical, as well as environmental, community relations and management roles.

Such agents and processes of translation do not exist accidentally: they prosper within organisations when corporate cultures enable diverse voices, perspectives, and ways of characterising problems.

They prosper where a social licence mindset has been encouraged.

The rate of societal change in expectations now presents the greatest business risk if it is not addressed and managed effectively.

At Futureye we work on developing an in-depth assessment of audience, expectations, outrage, and interrelationships, because we know it is key to formulate and execute a strategy that resolves social licence threats.

Such social research develops lead indicators with stakeholders so that these are mutually addressed before they impact social licence. Listening and engaging with stakeholders in such a way reduces concerns, generates mutual understanding of risks, and vastly reduces the potential for conflict to occur. It also creates opportunities for business innovation and a way to reach business KPIs quicker.

Such a process is not able to be done as a ticked box exercise or as a corporate communications add-on. Meaningful change, not messaging, is required if a company is to succeed in reducing business risk and developing a social licence mindset. Society increasingly expects nothing less and will always engage angrily with those companies who do not align and move to exceed societal expectations.

Katherine Teh-White is the founder and managing director of management consultancy firm Futureye. Her social licence to operate methodology and problem-solving approach has made organisations in the extractives industry more successful in an era of quickly shifting community expectations and instantaneous communication.

Piers Gillespie has worked in crisis management and outrage mitigation for some of the world’s largest multinational corporations on critical business issues. He has delivered sustainability through international supply chains and improved how industries interact with communities and key stakeholders in the international palm oil and mining sectors.

[1] See Franks D et al (2015), Conflict translates environmental and social risk into business costs, PNAS, 111 (21) 7576-7581; this document cites widely from this article.

[2] See: Futureye (2015), The Age of the Tree Hugger: Why Society Expects Sustainable Innovation from Your Business Now, citing UNDP (2015), The Millennium Development Goals Report.