Social License & Risk Management

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Social License

You are more likely to accept criticism from a friend you know and trust rather than from a stranger. The friend has a “social license” to challenge you; the stranger doesn’t. Even with people we trust, this license often has limits - you might tolerate a close friend critiquing your career decisions, but not your dating choices.

Risk management teams work the same way. They need a social license to challenge the business. This social license is typically granted, at least initially, through regulation. It is then often expanded by senior management adding more risk team responsibilities. Specific business areas may also choose to grant the risk team an even greater social license, often based on softer factors such as trust and competence.

Finding the Right Balance

Organisations must find balance: if the barrier to providing challenge is too low, decision-makers will respond to relentless risk team comment by ignoring the risk team's conclusions. If the barrier is too high this will be too restrictive of risk team activities, and limit the value the risk team can provide. To understand the concept better, let's take a brief historical detour to Ancient Greece and 1970s Mexico.

Ancient Greece

Athenians valued Parrhesia: boldness or freedom of speech. It was a democratic obligation to speak truth for society's benefit.  In principle, Athenian culture celebrated the idea of Parrhesia, but in practice it was more complicated. Parrhesia created a platform (or bema) for dissent, but Athenian society did little to support the dissenters themselves.  Citizens were “known to shout down or even drag speakers they disliked… off the bema… freedom to discuss politics, morals, religion, or to criticise people would depend upon the context: by whom it was said, and when, and how, and where.  If one was seen as immoral, or held views that went contrary to popular opinion, then there were great risks involved in making use of such an unrestricted freedom of speech, such as being charged within impiety.” (2) Only skilled speakers, or those with a powerful political network, had a real opportunity to shift public opinion.

So although dissent was allowed, it was not always effective. And rightly so; societies can’t cede power to everyone that shouts from a platform.

Drunken Mexicans

A 1970s study of Oaxacan villages observed that drunks were entitled to “shout insults, intrude uninvited into social gatherings, and behave in other normally unacceptable ways” (3).  This reduced the barrier to challenge (and made it more fun!), however it was often ineffective. Whilst we may not think it at the time, drunks are seldom the clearest of communicators, nor the best at sticking to the most salient points.

Sources of Risk Teams Social License 

Social license for risk management teams comes from various sources, including: 

• Regulatory and legal mandates,

• Key client / counterparty / rating agency expectations,

• Senior management empowerment,

• Membership of decision-making forums,

• Formal roles and responsibilities,

• Respect for team expertise, and

• Informal relationships with key decision-makers.

The stability of these sources varies. Informal relationships and respect for expertise need to be cultivated, which can take time.  Formal roles are more stable but are not immune to being revoked by those in power.  In reality there are often multiple power bases within an organisation, each of which has the ability to grant some element of social licence.

Why Social License Changes Over Time

Social license is not fixed. It can shift due to factors such as business performance, perception and politics. To illustrate this point, consider two teams within an organisation, "Team A" and "Team B":

When Team A's performance deteriorates, it increases the risk team’s social license, as it seeks help to identify and address issues.  However, during periods of strong performance Team A reduces the risk team’s social license as its leaders prioritise autonomy over risk team challenge. 

Conversely, when Team B's performance deteriorates it seeks to reduce the risk team's social license, prioritising narrative control over engagement with the risk team.  However during periods of strong performance Team B increases the risk team’s social license, valuing risk’s contribution only where it perceives job security to be strong.   

Note that, from each team's perspective, this might be the most rational course of action. Teams with lower social capital, and that are more periferal to an organisation's strategy, are probably more likely to face job insecurity during periods of poor performance. It may be rational for such teams to seek to reduce risk management's access so that issues can be downplayed and the effectiveness of remediation plans exaggerated.

Measuring Social License

When considering a risk team’s social license, it important to consider;

1. What elements of the business it is empowered to challenge,

2. The scope of challenge it is granted to use,

3. Which part of the decision-making process it is empowered to engage in, and

4. The types of tools and frameworks it is allowed to use. 

You can think of any business decision as having three core elements:

1. Intent (or strategy),

2. Design and application of process, and

3. Outcome. 

If a risk team cannot challenge all three its impact will be limited. The timing of challenge also matters. If challenge occurs after a decision has been agreed and socialised then challenge will likely be limited to major issues that could have an immediate impact, or less material issues that can be fixed with minimal cost or effort. If the challenge is provided midway through the decision process, the scope for constructive criticism is greatly increased.

Using Social License to Guide Risk Team Strategy

Risk teams can assess their social license for each key decision and process with each business area. Where social license gaps exist, risk teams should develop a strategy to build trust, competence, and access. These plans often take months or years to resolve. Building trust often requires Risk teams to opportunistically take advantage of risk events, process issues and change initiatives to demonstrate relevance.

While social license gaps are being addressed, risk teams should develop a tactical strategy to facilitate challenge from other teams who have a stronger license. This can include leveraging consultant expertise, bringing in other challenge functions (such as internal audit), or utilising semi-independent business expertise (such as subject matter experts from a different office or department).

Risk teams should document and communicate the limitations of their social license, especially where it affects the accuracy of their assessments. Boards need to understand these limitations to make informed decisions, and Risk Committees need to understand risk teams' social license in order to monitor the effectiveness of second line challenge across the business.

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Hopefully that has sparked some ideas.  I am hoping to start a discussion with this blog.  If you find it interesting, please share! If you would like to contribute or share feedback, please comment below or message me on LinkedIn!

The next post will explore some of the ways in which organisations can deliberately or unintentionally impair risk management teams’ "Social License".

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1[He, V. F., von Krogh, G., & Sirén, C. (2022). Expertise Diversity, Informal Leadership Hierarchy, and Team Knowledge Creation: A study of pharmaceutical research collaborations. Organization Studies, 43(6), 907-930. https://doi.org/10.1177/01708406211026114]

2[The Two Clashing Meanings of 'Free Speech',  Teresa M. Bejan, The Atlantic, December 2, 2017]

3[The Role of the Drunk in a Oaxacan Village1 PHILIP A. DENNIS, December 1975, American Anthropologist, The Role of the Drunk in a Oaxacan Village on JSTOR