Social License: A Profitable Issue

“In our society, there are those who strongly support the mining industry. On the opposite side, there are people who will never accept our activities. Finally, in the middle, there are a huge number of individuals who do not have any information. Certainly, we need to work on them.”

Perhaps this manager´s opinion sounds simple for those who usually identify stakeholders and their interests, priorities, strengths, and threats; however, it is also true that identifying those social groups where the industry should reinforce its actions is important.

Measuring the effectiveness of stakeholder, investor and other corporate communication activities has always been somewhat ambiguous. However, even this difficulty is changing. There are a number of measuring methods of stakeholders’ engagement around the world.

One interesting case is that of Wharton Professor of Management, Witold Henisz, who has found a way of measuring the benefits of stakeholder engagement activities to public mining companies that operate in risky environments. Henisz and two co-authors researched the role that stakeholder events played in companies’ efforts to maximize profits. The answer: huge.

As Henisz points out in a paper entitled “Spinning Gold: The Financial Returns to External Stakeholder Engagement:” “There is a powerful business case to win the hearts and minds of external stakeholders. We found in our research that the value of the relationship with politicians and community members is worth twice as much as the value of the gold.”

The authors used data from 26 gold mines owned by 19 publicly traded firms between 1993 and 2008. By coding more than 50,000 stakeholder events from media reports, the researchers developed an index of the degree of stakeholder cooperation or conflict for these mines.

In addition, Henisz and his colleagues reviewed data of gold mining firms listed on the Toronto Stock Exchange, so as to calculate the net present value of their mine. That value was then compared to the company’s market valuation. The result: the companies traded at a 72% discount compared to their net present value. Why? Because the net present value did not take into account the probability of delays or disruptions, and the cost overruns or revenue shortfalls that result.

By incorporating the stakeholder cooperation index in a market capitalization analysis, the researchers reduced the discount placed by financial markets on the net present value of the gold from 72% to between 33% and 12%.

According to Henisz’ research, $15 billion of gold sitting in a mountainside cannot be transformed into profits with financial, engineering and marketing inputs alone. It requires the political and social support of key stakeholders, including not only members of the economic value chain, but government officials, regulators, community leaders and members of civil society.

“It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction and the world price of gold,” he states. “Today, I can show you two mines, identical in terms of these three variables, that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn’t.”

Certainly, these findings are applicable to other industries, including construction, oil and gas, agriculture, minerals, alternative energy and water. All of them are connected by similar characteristics since they involve large building projects, substantial upfront investments and long payback periods.

If companies want to maximize their profits, there is a degree of stakeholder engagement that they have to undertake. The links between perceptions of social responsibility and market valuation are different among industries and countries. Their existence, however, is essential. Today, the social license to operate is more than a theory; it is measurable and strategically relevant.