4. Stakeholder Interests and Influences and the Social License to Operate

As suggested in the previous chapters, the expectations of a number of parties and constituencies regarding appropriate corporate ES&G behaviors have evolved considerably during the past few decades. New expectations concerning particular issues continue to emerge periodically. This chapter begins with a discussion of how leading companies are choosing to define their relationship with the communities in which they operate—the concept of the social license to operate. The chapter continues by identifying the major types of constituencies involved in the continuing debate about corporate ES&G behaviors and describes their influence at a general level. The chapter concludes with a more in-depth examination of the ES&G issues that typically are of greatest interest to each major stakeholder group and the types of influences applied by these stakeholders when their concerns are not adequately addressed.

As described later, in the early years, substantial demands for improved corporate EHS, social, and governance practices generally were issued almost solely from two types of entities. Both of them, in theory, represent the American people. One was the various agencies of government, which operated through the processes described in the preceding chapter. The other was a loose network of nongovernmental organizations (NGOs), many of which came into being during the formative years of the environmental movement. These organizations focused on either broad-spectrum environmental protection or on particular aspects of the natural world (such as wildlife or rain forests). Because most of these NGOs were and are legally organized as nonprofit corporations, they are obliged to operate in a manner that supports certain defined public policy goals, as discussed in Chapter 2. Most of the other types of company stakeholders that are now actively engaged with companies on ES&G issues were largely absent from the debates on these issues. Accordingly, for many years, the public agenda concerning environmental issues was primarily defined by NGOs clamoring for more controls and mandates on one side; corporations and their trade associations resisting new restrictions on the other side; and the EPA, other federal agencies, and Congress in the middle. Our elected representatives and, operating under Congressional directives, executive branch agencies invested vast amounts of time and effort attempting to determine the facts and institute public policies that appropriately protected human health and the environment and also were technically and economically viable and sensible. More often than not, it seemed, the outcomes of this process represented a compromise between two more or less diametrically opposed points of view. This situation largely prevailed through the 1970s and 1980s.

Since that period, however, the picture has become vastly more complicated, with the involvement of many more participants addressing more issues through multiple means. With the advent of socially responsible investing (SRI), which really coalesced into a meaningful industry and force in the 1990s, another set of voices was added to the debate. It focused on the financial aspects of improved corporate EHS, social, and governance performance. In addition, community-based organizations took form across the country and brought attention to the disparities thought to exist in environmental conditions, health status, and the presence of threats to both in communities of color and poverty relative to more affluent areas. These concerns gave rise to the concept of “environmental justice.” This is the principle that no group of people in the U.S. should be subjected to disproportionate exposure to pollution, a degraded local environment, or other conditions that pose threats to their health and well-being. Over the course of the last 15 years or so, through inclusion in several federal executive orders, the principle of environmental justice has become more broadly accepted. It has been integrated into rulemaking processes across the federal government. More generally, focus on the community level also has helped empower citizens across the board to understand environmental and health issues more directly and tangibly. Using a number of new tools that exploit the dramatic increase in the available information on corporate environmental performance, people across the country have unprecedented access to what is happening inside the fence line of many thousands of facilities and companies in their communities and beyond.¹ Moreover, as discussed in the preceding chapter, company employees and customers have become far more discerning and demanding in terms of the ES&G posture and performance that they view as acceptable, as have investors and even suppliers.

This greatly expanded set of stakeholders who care about ES&G issues precludes the effective management of such issues through limited, tactical, fragmented, and reactive approaches. Such approaches were common in the early days of EHS management in companies. As discussed in depth in Chapter 5, what is required today in response to growing and more diverse stakeholder expectations is an integrated approach that is strategic, coherent, systematic, inclusive, and tailored toward individual constituencies and their concerns. These constituencies are identified and profiled later in this chapter.

First, however, it is important to be clear about why companies should engage with and take seriously the concerns and issues of their stakeholders. Some observers might think this is obvious or self-evident. But I believe that it is fair to question this presumption and provide an answer that is responsive to the expectations of the financially focused executive or manager as well as the skeptical reader.

Although this more expansive and inclusive view of corporate responsibilities can be expressed in a number of ways, I am inclined to favor the notion of the “social license to operate” as a starting point. There are several reasons for this. One is that it more accurately reflects the dynamics at play between a company and the broader society in which it operates. As shown in Chapter 3, numerous important external influences on the corporation have an interest in ES&G posture and performance. It is increasingly clear that many influential stakeholders will be dissatisfied with blithe assertions that if the company maintains a singular focus on profits, benefits (utility) to shareholders and society at large will be maximized. Indeed, firms that ignore stakeholder concerns in pursuit of profit risk relationships that are vital to securing and retaining future customers, sources of financing, key employees and business partners, and other assets and inputs needed to maintain and grow revenues and earnings and limit operational and financial risks. (The reasons are described in Chapter 3 and demonstrated by empirical evidence presented in Chapters 6 and 7.) Sustainable companies don’t burn bridges that they will or might need, nor do they eat their seed corn because they are hungry today.

Another, and perhaps more unique, characteristic of the social license to operate is that the concept has been adopted and found to be effective in helping companies deal with complex stakeholder relations challenges in the context of managing some significant ES&G issues. In other words, this concept has been “battle tested” in the business world and has been found to be effective. By way of background, the social license to operate is a term first articulated and used extensively ten to 15 years ago in several extraction-intensive industries operating in different parts of the developing world. These companies wanted to gain (or maintain) access to valuable mineral, timber, or petroleum reserves that had been found in developing countries, often located in rural, even remote, areas. Many of these companies had won competitively awarded concessions or licenses to develop and extract these natural resources (that is, they had the legal right to occupy the site, develop the resource, and extract and remove valuable materials). Nevertheless, they encountered stiff local resistance from the indigenous populations in the area, as well as criticism from environmental NGOs and others concerned about both adverse environmental impact and the social equity aspects of the contractual arrangement. Through a sometimes-protracted process of trial and error, the affected firms came to realize that their ultimate success in maintaining their access to and benefits from their resource development projects depended on being accepted and trusted by the people on the ground who would be most directly affected by these projects. In a relatively short period of time, principles and best practices came to be defined and understood and are now in widespread use within the multinational minerals industry and several others.

The “social license” concept has been applied primarily at the project level. However, companies with prominent and potentially sensitive operations in the developing world are increasingly taking the sensible position that they need a consistent set of policies and approaches for how they conduct their operations globally. The importance of such consistency is discussed in greater depth in Chapter 5. An example is provided by Newmont Mining Company, a U.S.-based multinational minerals company operating mines, concentrators, and smelters in a variety of developed and developing countries around the world:Newmont has defined [social license to operate] as “the acceptance and belief by society, and specifically, our local communities, in the value creation of our activities, such that we can continue to access and extract mineral resources.” (Smith and Feldman, 2009)

More generally, there is widespread recognition in the minerals industry⁴ and beyond that the social license to operate is a valid concept that reflects legitimate concerns. Also, it is in the business and financial interests of companies to secure and carefully safeguard such a license. Finally, having this type of intangible asset allows a firm to operate in ways and in places that would not be feasible otherwise. Since the advent of this concept more than ten years ago and its application to a substantial number of specific projects and contexts, it has obtained a bit of a life of its own and is now used informally by a variety of companies and stakeholders. With that said, several attributes are worth considering as one contemplates whether a social license to operate is needed for a particular business enterprise and, if so, what is required to obtain and maintain such a license. These attributes include the following:⁵

• Social legitimacy. The company’s activities, either at a particular site or more generally, yield an overall net benefit for its stakeholders and society in general. Unavoidable adverse impacts may be associated with certain commercial activities (examples include loss of forest cover during rural mine development, and air pollutant emissions from electric power generation). But these impacts can be tolerated as long as corresponding benefits are greater in magnitude and are shared equitably among the company’s stakeholders.

• Credibility. The firm has demonstrated that it understands the concerns of its stakeholders, has the technical and managerial capability to manage its ES&G aspects, and is willing and able to both make and uphold commitments.

• Trust. This is the desired outcome and the most valuable intangible component of the social license. It can be obtained only by demonstrating both social legitimacy and credibility, and it generally requires years to establish.

Most companies do not face the daunting physical, technical, and managerial challenges of developing and extracting major mineral deposits from remote areas of developing countries. But I contend that the concepts and approaches developed in the crucible of such projects provide a useful model. As defined here, the social license to operate is a workable, business-focused concept that can be vitally important for companies seeking to understand and proactively manage the issues and concerns of their major stakeholders. For reasons discussed in the previous chapters (and the following ones), it will be ever more important in the future for companies, particularly large ones, to know what their stakeholders think, what is important to them, what they expect of the firm, how they want to be engaged, and what they are (or may be) willing to contribute to the firm and its success. As long as companies bear in mind the issues of social legitimacy, credibility, and trust, they are unlikely to go wrong (or very wrong) as they consider how best to address the concerns of their stakeholders. They must do this in the context of both long-range and day-to-day business opportunities and challenges.

The next section describes each of the major stakeholder constituencies that collectively determine whether and to what extent a company has earned and maintained its implicit social license to operate, and their unique roles and interests in defining and tracking important firm-level sustainability issues.

With that said, a great many executives and staff within these agencies recognize that regulation has practical limits. They also understand that if you truly care about improving environmental, health and safety, and/or social performance, finding ways to bring this about through nonregulatory means (such as through voluntary, beyond-compliance actions) is a practical necessity. Indeed, as discussed in Chapters 5 and 6, a substantial number of voluntary partnership programs have been established by the EPA, OSHA, the DOT, and other federal agencies and their state-level counterparts that target and involve both regulated and largely unregulated companies and industries. Although their record of accomplishments varies, there can be no doubt that well-designed voluntary programs can yield substantial benefits for all participants. One collateral benefit of the experience gained from operating these programs over the past 15 years or so is that for many companies, the level of mutual understanding, credibility, and trust between the firm and the regulator has increased markedly. This type of enhanced relationship is an asset that some companies have employed very effectively. It probably could be developed and used productively by many more firms and their leaders. We should always remember, however, that such relationships are based and contingent upon maintaining an effective program of full and continuous compliance with the law and all regulatory requirements.

Irrespective of what you think about the state of today’s news media, it is important to understand what the media does and how it works. For an issue or event to be considered “news” and therefore worthy of coverage, it must be recent, or “new,” and offer one of the “three Cs”—crisis, conflict, or controversy.⁹ Stories not meeting any of these criteria might occasionally be pursued and published/broadcast (such as human-interest items). But the news agenda always will be dominated by events meeting one, or preferably more than one, of the three Cs.¹⁰ Traditionally, this orientation has placed environmental and safety issues in the spotlight every so often. It is fair to say that media attention during the formative years of the environmental movement was enormously helpful in spreading public awareness of these issues and indirectly building public support and pressure for new laws. Unfortunately, however, many or most of our remaining problems are complex and cannot be easily reduced to a short television spot or newspaper article. Also, they do not involve an immediate crisis that can be captured visually (by a film crew or photographer), and they require some existing level of knowledge to fully understand and/or appreciate. Therefore, they tend not to make very compelling news items. Typically, the best we can expect is a general description of the issue or problem, preceded by the requisite story of a person and his or her experience with the issue. These are accompanied by two generally opposed points of view about what the issue or problem really is, its root cause, and what needs to be done about it and by whom. This serves the important function of bringing the issue to the attention of the public, but you could reasonably question whether it is enough for the reader/viewer to fully understand the issue. Moreover, as discussed in Chapter 2, the level of literacy in this country regarding ES&G issues and, more fundamentally, scientific principles, is quite low. This imposes some severe limitations on the extent to which the means of communication and the business model used by conventional media are or ever will be adequate to relay all relevant facts and perspectives to the American public.

As anyone involved in commerce or active in society more generally knows, the last few years have witnessed an explosion in the growth of social media. Enabled by rapid advances in information technology, creative thinking, and aggressive entrepreneurship, social media enterprises have sprung up far and wide and have given rise to modes of communication that did not exist a few years ago. As the ability to write personalized web logs (blogs) became widespread a few years ago, it opened entirely new channels. People could communicate and share “news” and opinion without the intervention of the established media, thereby democratizing the sharing of facts and opinion. More recently, phenomena such as, “friending” and “tweeting” have come from nowhere to the point where they are practiced by hundreds of millions of people around the world. The speed with which these developments have occurred is, to an outside observer, shocking. Importantly, these practices, and the companies that promote and impel them, are changing the rules for businesses of all sizes along multiple dimensions, presenting both risks and opportunities. Along with the ability of bloggers and tweeters to say what they want, when they want, to whomever they want, we have the absence of any mechanism to ensure that any statements or claims made are factual, or at least reasonable. Although the “old” media imposed many limitations on who could reach a sizeable audience, it also placed standards of conduct on its reporters and editors. It also promoted a high degree of professionalism and personal responsibility among its news correspondents. These largely self-imposed restrictions and sense of duty to the news profession seem more or less absent within the social media world of today. The exception is organizations and people who are attempting to migrate from the old media to the new.

Companies and their leaders and managers must be vigilant about their public image. Nowhere is their exposure greater than with respect to such issues as environmental performance, employee/supplier safety, labor conditions, executive compensation and other governance issues, and the like. In other words, ES&G issues and perceived company performance can quickly devolve into a story that meets one of the three Cs and can be transmitted instantaneously to millions of people before anyone at the company is even aware of them. In response, many companies are assigning corporate communications and other appropriate staff to monitor the blogosphere, “follow” organizations and people with an interest in the company/industry on Twitter, and take other measures to ensure that they remain up to date in real time on what others are saying about the firm. Other people, including senior corporate managers involved in corporate EHS management, are taking proactive measures to “inoculate” their firms against negative messaging by writing their own blogs about what the company is doing to improve its EHS performance. They also issue tweets as appropriate to point followers to pertinent web sites, company reports, and data, and to respond to claims made by others. Corporate leaders and managers interested in pursuing sustainability should pay close attention to ongoing developments in the social media domain. They should consider carefully how social media should be incorporated into company sustainability strategy moving forward.

Although this may seem like an arcane or minor point, it is not. It is through their legal standing and the associated ability of these groups to file lawsuits on behalf of the public that organizations such as the Sierra Club, Natural Resources Defense Council, Environmental Defense Fund, and a number of others could assert with at least some credibility that their positions on environmental (and, by extension, broader ES&G) issues and their actions reflect the will and preferences of American society. Those of us who have been involved in the EHS profession for some time have witnessed how these NGOs have repeatedly invoked the interests of the country in taking various positions on policy and regulatory issues. They have routinely and repeatedly asserted that they, rather than elected representatives or those appointed by them, have both the best interests of the people at heart and a well-formed and accurate interpretation of what the people really want in terms of U.S. public policy. Interestingly, however, few if any of these organizations take the views of their members or even their major supporters into account when formulating positions and desired policy interventions on particular issues. Instead, they rely on their own leaders and internal staff to decide which issues are important, what should be done about them, and what action(s) should be taken to alleviate a perceived threat or change the behavior of some set of third parties (generally, industries or companies using particular technologies, carrying out certain activities, or seeking access to publicly owned resources). The function of the membership is to provide money and, in some cases, to participate in campaigns to garner support for their position with members of Congress or the White House (such as through petitions, mailings, and/or phone calls). Having been a dues-paying member of several of these organizations, I can report that none ever solicited my opinion about any issue, whether pertaining to policy choices, organizational priorities, or internal governance. The only member access or control that is available in most of these groups is periodic elections for national board members and, in some cases, participation in state/local chapters or affiliates. In other words, despite their frequent calls for greater transparency and a more open public policy process, many of these NGOs take a highly paternalistic and even patronizing stance toward their own members in formulating their positions on important ES&G issues that are of general interest to the public.

The foregoing discussion may seem like “sour grapes” or, at the least, a bit off-topic. But it is important for corporate executives and managers to have an informed and clear-eyed perspective on NGOs when considering whether and to what extent they will be considered important stakeholders of their companies. Within the context of a particular firm, you can be virtually assured that more than a few environmental and labor NGOs would unequivocally assert the following:

• They represent the views of “civil society.”

• Accordingly, their views on a company’s operations and performance are legitimate and significant and are essential inputs to its deliberations on ES&G issues.

• As a consequence, it is imperative that you open and maintain a respectful dialog with them concerning these issues, and understand and carefully consider their views when making important internal policy and management decisions.

In my view, the leadership within every company should make an explicit judgment about the validity of each of these assertions and choose the appropriate level and type of engagement, if any. I have great respect for the accomplishments of many major environmental, EHS, and social NGOs and the contributions they have made to better the world. But I believe that, from the perspective of a corporate executive, a good deal of skepticism on the appropriate relationship with NGOs going forward is in order.

Figure 4-1. Changes in whether Americans value the environment or economic growth

Current results show that almost 40 percent of the public still supports protecting the environment even at the risk of curbing economic growth. This is true despite the continuing effects of the worst economy since the Great Depression and even though, for the first time since the survey was initiated, a greater percentage of people favor economic growth rather than environmental protection. With that said, it appears that public support for the environment has been tempered by the length and depth of the recession. In its release of the most recent survey data, Gallup concludes:

Over the past decade, Americans have dramatically reevaluated their priorities when considering the trade-offs of economic growth and environmental protection. As recently as four years ago, Americans maintained a strong preference for environmental protection. By 2009, those priorities flipped, and pro-economy attitudes have grown since then, apart from the temporary movement back toward the environment after the Gulf of Mexico oil spill. These changes illustrate that Americans’ opinions on environmental protection are dynamic and responsive to what is happening in the real world. Based on the historical trend, Americans seem to value environmental protection but appear willing to de-emphasize that goal when more immediate, everyday concerns like the economy need attention. (Jones, 2011)

In addition, more in-depth polling results show significant recent erosion in public attitudes and beliefs regarding some key environmental issues, and a growing divide along political lines. The decline in the percentage of people favoring environment over economy is strongest among self-identified conservatives and Republicans and weakest among liberals and Democrats. Similarly, support for and belief in the positive impact of the environmental movement has eroded significantly among Republicans and to a far lesser degree among Democrats (Dunlap, 2010).

This trend also can be seen regarding what is certainly the most pressing and important environmental issue—global climate change. For example, in recent polls, positive responses to the question “How serious of a threat is global warming to you and your family?” declined by ten percentage points (from 63 percent to 53 percent) from 2007–2008 to 2010 among U.S. respondents (Ray and Pugliese, 2011a). This was one of the largest percentage declines worldwide. The percentage who believe that rising temperatures are a result of human activity (34 percent) versus natural causes (47 percent), or are a result of both (14 percent), also showed a pronounced decline over the past three years or so. In the 2007–2008 poll, 60 percent of U.S. respondents attributed global warming to human activity or human activity and natural causes. In the more recent (2010) results, only 48 percent did so. Moreover, the U.S. is now the only developed country worldwide in which more people believe that global warming is due to natural causes rather than to human activity (Ray and Pugliese, 2011b).

Public concern about a number of other environmental issues remains strong, with a clear majority of Americans concerned a great deal or a fair amount about such problems as contamination by toxic waste, surface water and air pollution, maintenance of freshwater supplies, and extinction of plant and animal species. Loss of open space and global warming rank last on a list of ten such issues, however. In addition, the percentages of U.S. respondents who are concerned about these issues have declined for every issue, decreasing from 6 to 13 percent, depending on the issue (Saad, 2011).

Despite the declines in the overall level of support among some segments of the American public for strong public policies focusing on the environment, in recent years a substantial and stable majority has stated that they have made changes in their personal lives to live a more “green” life. About 90 percent report that they recycle, and 85 percent have reduced household energy use. Moreover, the percentage buying a product based on environmental attributes has increased 3 percentage points during the past ten years, from 73 percent to 76 percent (Dunlap, 2010). This suggests that opportunities remain for companies that can effectively understand and respond to the challenges posed by ES&G issues while meeting consumer expectations.

A recent survey of influential people in 23 countries¹² conducted by the global public relations firm Edelman shows that the expectation of ethical conduct and operating businesses in a way that benefits society is firmly rooted in the U.S. and every other country surveyed. More specifically, the survey found that substantial majorities in each country (85 percent in the U.S.) believe that corporations should create shareholder value in a way that aligns with society’s interests, even if that means sacrificing shareholder value. In most of these countries (including the U.S.), the majority also believe that government should regulate corporations’ activities to ensure that they behave responsibly. Globally, the level of trust¹³ that these people have in a variety of institutions, including business, has increased slightly during the past year. With that said, the level of trust in the U.S. of business, which already was on the low end of the range, declined further, from 54 percent to 46 percent. A similar decline could be observed for trust in government, and trust in the media declined precipitously, from 38 percent to 27 percent. (Globally, people in the more developed markets are the most distrustful of the media.) In contrast, the relatively high level of trust in NGOs in the U.S. increased from 59 percent to 63 percent. Overall, the U.S. was the only country studied in which the overall level of trust in institutions fell between 2008 and 2011. Looking more specifically at the business community, the level of trust in banking, insurance, and general financial services suffered the steepest decline during this period, while trust in technology firms remained high. Companies in the automotive sector experienced a substantial jump in trust, from 32 percent to 49 percent from 2009 to 2011. Interestingly, the factors identified most often as important in determining corporate reputation by survey respondents were quality, transparency, trust, and employee welfare. The factors ranked least important were admired leadership and financial returns to investors. This suggests that being attentive to ES&G issues is an important means of building and maintaining the firm’s overall reputation. Finally, the results of this survey validate the idea that trust has a protective effect on the firm’s reputation among the educated public. If negative information about a company is heard once or twice, 57 percent of respondents believe it if the company is distrusted, but only 25 percent believe it if the firm is trusted. Conversely, positive news has a limited impact on a company that is not trusted. Upon hearing positive news once or twice, 51 percent believe it if the company is trusted, but only 15 percent believe it if the firm is not trusted. The authors of this study conclude that the old corporate public relations framework based on controlling information, protecting the brand, and keeping a tight focus on profit must be replaced with a new architecture based on engagement, transparency, and the pursuit of profit with a purpose (Edelman, 2011).

To summarize, companies have a number of important stakeholders, each of which has its own characteristics, objectives, priorities, and expectations. Each of the major types of stakeholders is developing a stronger interest in ES&G issues and in how specific industries and companies are addressing them. The next section discusses in a bit more specificity how these different stakeholders tend to become involved in influencing corporate ES&G behavior and what issues tend to be of greatest interest to them.

This latter management model was prevalent during the century or so during and following the Industrial Revolution. It emerged from an industrial, mechanistic construct of how firms create value. Under this construct, capital goods and labor are largely interchangeable inputs, and the manager’s job is to determine the optimal mix between the two and to limit the overall costs of production as much as possible. In an information-driven economy, however, this model for managing the firm presents some serious limitations, because people are not inanimate inputs to the production process. The primary task of management today is to create the conditions needed for employees to contribute their best efforts, not to deploy them like objects, much less intimidate or subjugate them. Certainly, a basic duty of senior management is to ensure the continued health and safety of their employees while they are on the job, as illustrated in the following sidebar.

Regardless of the current approach taken to interacting with the firm’s employees, senior executives would be well advised to ensure that they understand any concerns regarding ES&G issues felt by their employees. These are likely to include but are not limited to hazards and unhealthful conditions on the job, including ergonomic issues; labor and human rights issues, particularly in off-shore locations; EHS performance of the company’s products and services in use; and any major disparities in compensation, benefits, and advancement and professional development opportunities provided to employees on the basis of anything other than merit. One of the core principles of sustainability is social equity—fairness. Fair dealing with stakeholders begins with and must include equitable treatment of the company’s members.

Even if it were unnecessary to maintaining the credibility of any organizational sustainability initiative or program, there are sound business reasons for ensuring that one’s employees believe they have a stake in the firm’s success. One is that they are the people who will make sustainable business behavior, improved practices, and better performance happen, or will not. They are the company’s ambassadors and public face. In many ways large and small, they communicate with the outside world what the company is about, whether it can be trusted, and, accordingly, whether it is a worthy employer and business partner. In the aggregate, they also know how everything works, where the problems are, (often) how they might be resolved, and where new untapped opportunities may exist.

In short, company employees may or may not be in a position to strongly influence its policies, direction, and priorities, but they should be the focus of any serious effort to pursue corporate sustainability. Much can be gained from understanding and addressing the ES&G concerns of employees and securing their involvement in charting a course and working toward a more sustainable posture. At the same time, much can be lost by ignoring employee concerns and involvement regarding ES&G issues. As these issues become more prominent in the future, it will become increasingly evident which companies are leveraging this key set of resources more effectively and which are not.

In addition, customers, including consumers, have shown that they are concerned about labor rights abuses and other social equity issues. Tolerance among sophisticated corporations and informed consumers of abusive labor practices, both domestically and internationally, is very low. Experience over the past 20 years has shown repeatedly that U.S. companies seeking to reduce costs by outsourcing and offshoring their production operations must be vigilant about the behavior of their subcontractors, particularly those supplying goods produced with very low-wage labor. To ignore or tacitly condone abusive labor practices is to accept significant reputational risk and the possibility of both consumer boycotts and termination of previously productive relationships with major retailers and other crucial distribution channels. In addition, as a broader array of labor, social equity, and other ES&G issues receives greater scrutiny from a growing number of end-use customers and major intermediaries, it will be increasingly important for companies of all types and sizes to ensure that they have clear policies, sound practices, and a performance record that they would not be reticent to discuss in a public forum. In other words, customers today feel empowered. In today’s operating environment of instantly available information and rising expectations, they expect their trusted suppliers to anticipate and respond to their preferences.

In response to such demands, companies will face the choice of either meeting these expectations or being prepared to replace customers who decide to take their business elsewhere. I submit that in most cases, the first choice will be easier to implement and explain and will provide a more robust foundation for continued, sustainable growth.

• Environmental aspects. Visible air or water pollutant emissions, noise, odors, and accumulations of waste

• Workplace safety and health. Exposure to physical hazards or chemicals, use of processes or agents that pose a great intrinsic hazard (such as explosives and radioactive materials), and inadequate processes and practices to control unsafe conditions or materials

• Labor relations. Aggressive efforts to prevent unionization, perceptions of punitive responses to worker assertiveness, or, in general, a dictatorial approach to company-employee relations

• Unusual public-private sector arrangements. Provision of dedicated publicly financed infrastructure, reduced or foregone tax collections, or perception of undue corporate influence

Community concerns often develop over an extended period. Minor issues may accumulate and fester for many years before they reach a point, or an event, that causes them to erupt suddenly and forcefully. Company executives may be surprised by the nature of the reaction they receive and the vehemence with which their behavior and motives are questioned. It is easy to take for granted the firm’s relationships with host communities, but doing so risks maintaining the social license to operate, which, as discussed earlier, really has its basis in these relationships. The consequences of an erosion in the trust between a company and the community, and with it the strength of the social license to operate, may not manifest themselves immediately. But they will be felt directly and dramatically under certain rather predictable conditions.

Community concerns rarely rise to the level at which a company’s normal operations are disrupted, but the outlook can change dramatically if the firm wants to make a major change in the status quo. Such changes may include expanding production operations and/or a facility’s physical footprint, initiating the use of certain new technologies or equipment, using significantly more of a natural resource (particularly water), or bringing new materials on site. Generally, major changes such as these require the issuance or renewal of one or more permits by state or local authorities. In addition, certain types of activities require permit renewal, regardless of whether substantial changers are being made or proposed, at regular intervals. In either case, because these permitting activities usually involve a public participation component (such as public hearings), they give members of the community access to the decision-making process. These activities also empower people to influence the public officials (whom they may have elected) who are responsible for making the permitting decision. In this way, community members can gain access to information that they may never receive otherwise, publicly state their concerns with the proposed change(s) and the company’s past behavior, propose alternatives, and voice support or opposition to permit issuance/renewal.

Company executives would be unwise, based on the experience of many others,¹⁴ to assume that community-level opposition is unimportant or inconsequential to continued operations at existing locations. They also should not assume that the support of the political leadership of either an existing or potential new host community is sufficient to obtain and maintain the social license to operate in that community. That said, this is an area in which risk and reward are highly asymmetrical. Quantifiable benefits from strong community-level relationships may be modest or negligible, but downside risk can be large and consequential. Moreover, along with maintaining a strong and positive set of relationships with company employees, it is difficult to see how any firm that would seek to become a sustainability leader would be either effective or credible in this regard if it did not recognize and respond to community-level concerns. The most effective way to establish the necessary credibility, earn the social license to operate, and mitigate risks is to invest time and effort in building and maintaining respectful and informed relationships with host communities. Ideally, these relationships operate through multiple channels. This ensures that the company’s story is told in a way that does not hide or shy away from possible community concerns on the one hand while collecting and reporting any such concerns to appropriate parties in the management chain on the other.

With that said, it would be incorrect to assume that regulators have no further interest in how companies are approaching ES&G issues. It is widely understood within federal and state agencies charged with environmental, health and safety, energy, transportation, and other regulatory responsibilities that laws and regulations can induce improved practices to a substantial extent. It is also understood that such mandates have natural limits, beyond which they become overly complex, unwieldy, inefficient, and prone to producing perverse outcomes. In response, a wide array of voluntary, beyond-compliance programs have been developed and deployed during the past 15 years or so at all levels of government. Many of these programs are well-known and respected (such as Energy Star), and many more have achieved noteworthy results.

The existence and success of these programs highlight some key attributes of regulatory agencies and those who work within them. First, these organizations are not monolithic and may not speak with one voice. Frequently, individual subunits are responsible for compliance assurance and voluntary programs, and the management and staff within each may have very different priorities and views on a particular ES&G issue. Accordingly, it is important to understand with which part of the organization you are dealing and to correctly interpret their mission, major activities, and likely priorities. Another attribute is that regulatory agencies are staffed with people who believe in the mission, often fervently. Far from being faceless, disinterested bureaucrats, most management and line staff in regulatory agencies have made affirmative choices to work for their employer, often for compensation that lags that of their corporate counterparts. Generally, they have chosen to work in government not because they had no other career options but because they want to contribute to a better future. Perhaps they want to improve the quality of the nation’s waters through writing wastewater discharge permits, or provide technical assistance to small generators of hazardous waste, or inspect safety conditions on the factory floor.¹⁵ Many if not most of these people have an abiding interest in improving the quality of the environment, reducing hazards to human health, and promoting a more sustainable society. Consequently, they are often willing to consider ideas for reaching these goals that do not necessarily fit neatly within the confines of existing regulatory (and even nonregulatory) programs. They may be willing to offer informal feedback, provide technical information/guidance, identify or make introductions to executive-level agency representatives or others with decision-making authority, and otherwise serve as valuable resources to companies having an interest in pursuing sustainability in new and creative ways. Such people often have valuable perspectives and will offer them willingly if asked.

In my experience, however, regulatory agency staff, and even senior managers, are often reluctant to advocate active involvement of their organizations in the workings of private sector entities. Accordingly, they may be hesitant to offer their own judgments about what approaches are preferred, what distinguishes “good” environmental or ES&G performers from otherwise similar firms, or what form or level of performance would be considered desirable, beyond articulating some general principles. This is unfortunate, because corporate managers often don’t understand (and sometimes are frustrated by) what regulators expect of them. Generally, corporate executives and managers value clarity and predictability above many other considerations, not least because complying with past EHS regulations often has required the commitment of substantial capital. Outside the arena of explicit regulatory limits, however, such clarity has often been absent, because regulators may be placed in a quasi-advisory role in which many feel ambivalent or uncomfortable. As the concept of sustainability becomes more widely accepted and adopted by U.S. businesses, it would be appropriate for environmental regulators to overcome some of their reticence, offer more of their talents and accumulated judgment and expertise, and demonstrate real leadership. Until this happens, corporate leaders may want to consider initiating some conversations with regulators having a particular interest in sustainability issues that are important in some way to their continued business success.

Occupying one pole is a small number of media conglomerates¹⁶ that own a large percentage of the major daily newspapers, which tend to define the news agenda, as well as the major commercial television broadcast and cable networks. As a consequence, the notion that our mass media is in any respect “independent” seems more quaint and unrealistic with each passing year.

On the other pole are a proliferation of blogs, tweets, viral videos, and other contributions authored and transmitted, with little or no oversight or filtering, by millions of people around the world. This “democratized” media has been growing exponentially and has sapped the strength and threatened the viability of traditional media (particularly newspapers) in major markets across the U.S. and internationally. In particular, advertising revenue has declined precipitously as advertising spend has migrated to more effective channels (mostly online). These developments have had many positive implications, such as giving more people access to more information more quickly. They also have decimated the finances of news organizations that until recently may have employed hundreds of professional journalists around the world. These correspondents could be counted on to remain current with developments in their areas and to report newsworthy happenings on a daily basis. These jobs, and the people who filled them, are disappearing rapidly. In their place are local bloggers and self-appointed correspondents who may or may not meet traditional standards in terms of general understanding and knowledge, lack of clear biases, quality and depth of reporting (including verifying information), and professional integrity.

Unfortunately, the ground that would ideally occupy the middle part of the spectrum between these two extremes appears to be increasingly barren. Midsize (or even large) independent daily newspapers, radio stations, television networks, and other sources of information of interest to the public are increasingly scarce. It is unclear whether or when this situation will change appreciably, though there is hope that at least some newspapers and their news-gathering and analysis functions will successfully transition to a more fully digital world. This will require that they develop and apply business models that generate sufficient revenue and are more resistant to disruption than was print media.

In the current context, the important point to remember is that today, media takes many different forms. It is fed by traditional reporting by professionals as well as both spontaneous and planned development of “content” by a diverse array of nontraditional sources who are not bound by traditional codes of conduct and may have a variety of agendas. This situation has several implications for corporate executives and managers. One is that vigilance is important, because companies no longer control the message as they once did, and because negative information, whether accurate or not, can circulate and be widely accepted quickly. ES&G issues are a particularly potent source of potential perception risk. For this reason, senior executives of firms with prominent ES&G issues may want to ensure that a member of their communications staff regularly monitors the blogosphere, major NGO web sites, and message traffic on Twitter. Another implication is that a firm’s degree of transparency becomes more of a strategic issue than in the past. Because the potential impact of ES&G disclosure is greater than in the past, company senior executives will want to think carefully and make definitive decisions about what type(s) of company information to release publicly, in what formats and forums, and with what frequency. On a related note, it is becoming more important for senior executives and company spokespersons to become more conversant with ES&G issues so that they can more effectively respond to routine questions from the media and to crises, should they arise. Accordingly, these executives should ensure that they are briefed regularly on ES&G status, trends, and performance. They also need to establish (or maintain) an internal communication process to ensure that they are alerted to any ES&G-related incidents or events (whether positive or negative) that may induce media coverage.

With that said, it is possible to offer a few general observations:

• It is important to identify the NGOs that have a specific interest in your company, its industry and major lines of business, and/or its more prominent ES&G issues. Insights about which organizations are active and may have an interest in your firm probably can be obtained from your firm’s EHS staff (for environmental and safety issues), plant/facility managers (for community-based issues), investor relations staff (for investor and analyst concerns (discussed further later)), and communications or public relations personnel (for issues of general interest to the business community, the media, or the public).

• As suggested previously, it would be prudent to think about, before any crisis or confrontation, what type and level of engagement the firm would consider for any particular type of NGO. It is perfectly reasonable to reject the contention of any NGO that it is an important stakeholder deserving of company time and attention based on the merits (or lack thereof). It is far easier to make and defend such a decision in any particular case if some criteria or rules have been established in advance and are applied uniformly across the firm. In practice, such criteria often come down to the same issues that frame any business relationship. In other words, what are the benefits if we do engage with them, and what are the risks if we don’t? Business leaders should not be surprised if the answers to these questions, as applied to a particular set of NGOs, are not directly in line with the aggressiveness with which a relationship is sought, or with the stridency of any accompanying message(s).

• Company decision makers should be clear on what they hope to get from any NGO engagement or other type of relationship. They should insist on a clear statement of objectives from each counterparty. Clarity on and honesty about objectives will make any such interactions more productive and help avoid disagreements or confrontation. Many companies large and small regularly engage with NGOs as part of their philanthropic activities. This is admirable, but it’s quite different from a situation in which the corporate-NGO relationship ostensibly is about a different set of goals and activities. Everyone should be clear at the outset (or shortly thereafter) why an engagement or collaboration is taking place, what each party will contribute, what outcomes are being sought, and what indicators will be used to measure progress.

The following sidebar describes how companies can deal effectively with increasing stakeholder expectations.

Furthermore, certain investors are becoming far more activist in their orientation than in the past. Led by major SRI investors and investor-led coalitions, they are pursuing a variety of strategies to ensure that their concerns about particular ES&G issues are understood and being acted on by a wide array of companies. These strategies include intensive consultations, shareholder resolutions, public information and awareness-raising campaigns, and other measures that generally advocate behavioral change on the company’s part. Such changes often involve corporate governance structures and practices, transparency (public disclosure), conducting business in certain countries (such as Sudan and Burma), or positions on or preparedness for particular ES&G issues, the most prominent of which is climate change. These activities are meeting with considerable success, in that many companies have acceded to the demands made by these investors and coalitions. These successes, in turn, appear to be fueling even more shareholder-driven activism and involvement in corporate affairs. Accordingly, executives and managers in all publicly traded firms should be aware of and prepared for the possibility that investor involvement in your company’s management of its major (and even minor) ES&G issues may be coming, if it has not arrived already. These issues are explored in greater depth in Chapters 6 and 8.

In terms of the types of ES&G issues that are of the most interest, the public tends to focus on performance outcomes, particularly when they are adverse and unexpected (such as, spills and deaths/injuries). Not coincidentally, as suggested earlier, these are the types of events that tend to attract the most media interest and news coverage. With that said, the public appears to be increasingly interested in corporate performance along some more subtle dimensions, particularly energy use/greenhouse gas emissions, use of recycled materials, and production of “cleaner” products.¹⁷ And as always, our citizens (and those in many other countries) tend to be skeptical of corporate claims regarding environmental and other ES&G improvements, product attributes, and behaviors. These changing expectations are not going unnoticed by attentive sustainability professionals in leading companies. According to Tim Mohin of AMD:

A big factor [in the emergence of sustainability] has been changing expectations. In particular, young people care much more about corporate behavior than did previous generations. This may be a reaction to the rise of the corporation as the dominant social institution of our time. We now live in an age when the reach and power of corporations exceeds many nation-states. Increasingly, people, especially young people, believe that with this growing power comes the responsibility to do the right thing. (Mohin, 2011)

Despite these recent trends, however, the long-predicted dawn of an era of widespread public environmental awareness and sustainability-driven behavior has yet to appear, at least as manifested by either consistent consumer attitudes and purchasing patterns¹⁸ or in the beliefs and stated priorities of the public at large. I am somewhat skeptical that we will see such an era any time soon, particularly given the persistence of a low rate of economic growth and the “jobless recovery” that has taken hold in the U.S. economy. This is not to suggest, however, that corporate leaders should ignore public opinions and beliefs about either ES&G issues generally or in the specific context of their firms. Continued vigilance on these issues and public perceptions about one’s firm and industry is certainly warranted. Being trusted by stakeholders is an important asset to any company. For consumer-facing firms, establishing and maintaining trust with the public is a key component of brand value. Indeed, as has been pointed out by others (such as Martin, 2011), one important limitation of “green” marketing efforts to date has been a lack of trust among many consumers and members of the public caused by the perceived absence of credible ES&G behavior and performance by many corporations. Overcoming this hurdle may be difficult. But it is reasonable to assert that the leadership of any company should invest time and resources in at least maintaining, if not enhancing, the firm’s credibility, trust, and brand strength as a sustainable business in the future.

In summary, companies have a broad array of important stakeholders with disparate interests, priorities, and specific concerns about how the firm approaches its environmental, health and safety, social, and governance issues. Executives and managers who would seek to position their firms as sustainability leaders would be well advised to invest the time and effort needed to identify their important stakeholders, understand their expectations and concerns, formulate and execute one or more engagement strategies or a set of principles for doing so, and actively manage their relationship with each important stakeholder or group. Making this investment is the best way to secure and maintain the firm’s social license to operate, manage several important sources of business and financial risk, and leverage some of the company’s principal intangible assets.

The next chapter builds on the foundation established in this and the previous chapters. It shows how executives and managers within companies of all sizes and types can effectively respond to and actively manage the ES&G issues that are being brought to bear by their stakeholders and American society at large.

2. Chapter 6 discusses this issue extensively.

3. This includes not only think tanks and NGOs but also highly influential management “gurus” such as, Michael Porter. See White (Ed.), 2009 for a good example of the former. See Porter and Kramer, 2011 for details on the latter—in particular, Porter’s notion of “shared value.”

4. For an exhaustive examination of this issue and the broader sustainability challenges and opportunities facing the global mining and minerals industry, see Mining, Minerals, and Sustainable Development Project (MMSD), 2002.

5. This discussion is adapted from concepts presented on the web site www.socialicense.com/definition.html.

6. It is not uncommon for certain named executives and other key company employees to have legally binding employment agreements precisely because their departure could pose grave competitive threats to the firm’s continued success.

7. In fact, this type of approach is increasingly becoming the norm in many industries and among leading companies. Certain minimal standards regarding EHS management practices, use (or absence) of certain materials, regular performance reporting, and other requirements are increasingly finding their way into the standard contracts used (and insisted on) by many leading companies.

8. These phenomena were discussed at length in Chapter 3.

9. My understanding of these phenomena was greatly enriched by media trainer and consultant Norm Hartman, whom I hired several years ago to provide executive media training for a client.

10. If you are skeptical about this claim, watch the nightly news on television some evening and count how many stories meet the criteria and how many do not. Or consider how often we hear of a plane/train/bus/ship crash or armed conflict with many fatalities in some faraway place, and ask yourself what we, the readers/viewers, are supposed to do with this information and how it will affect our lives or interests.

11. As discussed in Chapter 3, most of these organizations are legally organized as nonprofit organizations under IRC 501(c)(3). More specifically, nearly all the major national environmental NGOs are organized as nonprofit membership organizations, which both charge annual dues and periodically ask for supplemental (and tax-deductible) cash contributions.

12. Specifically, college-educated people ages 25 to 64 in the top 25 percent of household incomes in their age group in each country.

13. As reflected by responses to the following question: “How much do you trust [institution] to do what is right?”

14. The experience of companies in the international minerals development industry offers some important cautionary tales in this regard. Most businesses do not face the extreme challenges of the companies in this industry, but the same principles apply, irrespective of whether one’s company faces a crisis situation.

15. I feel confident in making this statement because I have worked on behalf of or with scores of such people during my career and have had at least some interaction with hundreds more. At least in the realm of EHS policy and management, I have found that by and large, public agency people are just as dedicated and competent as their corporate counterparts.

16. These include firms primarily involved in news (CBS, News Corporation, Thomson Reuters), entertainment (Disney), distribution (Comcast), and a number of other enterprises.

17. By “cleaner” products, I mean the considerable and expanding supply of goods labeled or promoted as “green,” “organic,” “natural,” and the like.

18. Indeed, some longtime observers have suggested that “green marketing” has outlived its usefulness and should be abandoned in favor of greater emphasis on determining life cycle characteristics and improved transparency. (See Makower, 2011 for further perspective on this issue.)