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Hacking Scandal Could Cost News Corp. Its ‘Social License’

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The phone-hacking scandal has done great damage to the stock of News Corp. and to the public image of its owner and founder, Rupert Murdoch. But the biggest harm may have been to another asset: the company's social license. And I'm not talking about the prospect of Rupert and Wendi Murdoch not getting invited to dinner parties in the Hamptons. Rather, I'm talking about a somewhat vague but important concept. Operating a business and working in different markets, even regulated ones, may be a right that courts can enforce. But at a deeper level, it is also a privilege. And so in addition to a formal government license, companies also need an informal 'social license.'

A company, or an institution, gets and maintains a social license if it generally behaves and runs in a way that other businesses and institutions want to do business with it, and that governments and society at large tend to welcome them as a present. Sure, a CEO may define his or her duties as owing primarily to the bottom line and to shareholders. But a company is also evaluated, and valued, based on how well it plays with others, and on whether people want it operating in their neighborhood. (In the accompanying video, Aaron Task and I discuss the concept of social license.)

Companies that possess a social license often find it easy to expand into new areas. Danny Meyer, the do-good, feel-good restaurateur, just opened a Shake Shack in the Connecticut town where I live, and nobody seems to mind the big traffic jams or generally unhealthy grub it has brought. It is common for hosannas to erupt when the city fathers announce a Trader Joe's is coming to town. These cuddly guys have an expansive social license.

But Wal-Mart? Not so much. America's largest retailer rose to dominance through an aggressive strategy of low pricing, low wages and hostility to unions. In the rural areas where it thrived for its first few decades, that wasn't a problem. But having saturated the sticks, Wal-Mart found that its policies and corporate culture made it unwelcome in many large cities where labor and small business groups had a good deal of influence. With domestic growth having stalled, Wal-Mart now realizes that its future in the U.S. rests on making headway in cities where it currently lacks a social license to operate. It is desperately trying to get into the lucrative New York City market, for example. Wal-Mart has been trying hard to improve its image by offering better health benefits to associates and getting involved in sustainability issues. But that hasn't helped it pry open the closed Big Apple. When you don't have a social license in a particular area, it means that instead of being invited in and receiving incentives, you might have to buy your way in. Wal-Mart just donated $4 million to a New York City jobs program as part of an effort to improve its image in New York.

The consequences of losing a social license — or not having one in the first place — can hit the bottom line in several ways. Companies that exhibit disregard for industry norms frequently find they simply aren't welcome in lucrative markets. Chinese media companies, most of which are cozy with China's censoring regime, don't yet have a social license to acquire companies in the U.S. Or they may find themselves shut out of competing for highly public business and contracts. Is anyone surprised that when the U.S. Treasury Department chose an underwriter to manage the sale of its stake in Citigroup, it chose Morgan Stanley, and not Goldman Sachs? As I noted last year, Goldman offers something of a case study in how to get your social license suspended: Take a lot of risk in order to goose up returns, pay outlandish salaries, fail to deliver for shareholders, routinely rip the face off of customers, get in repeated trouble with regulators, all while resting on taxpayer-backed crutches and acting as if you are God's gift to capitalism. With its social license in danger of being suspended, Goldman is now a company that has difficulty fending off regulation, that can't take as much risk as it once did, and that can no longer bully as many clients and market participants. (I wrote about Goldman's social license last year on Slate). That helps explain why its stock has done poorly.

Social license isn't just about following the letter of the law. Companies routinely weather the bad publicity that comes from running afoul of regulators or crossing the line — and can hold onto their social licenses. But when transgressions are highly public, or particularly egregious, or repeated frequently, it's a different story. Given BP's long and shoddy safety record — from the Texas City refinery explosion to the Gulf of Mexico disaster — would you want the company setting up shop in your neighborhood? Let's assume new areas are opened for offshore drilling at some point in the future. Will BP be welcomed and treated on an equal basis with other companies? Should it?

Which brings us back to Murdoch, News Corp. and the hacking scandal. The real financial damage to News Corp. won't come from the legal settlements it may have to pay, or the cost of having to shut a profitable newspaper. And it's not likely that readers and advertisers will start to boycott the Wall Street Journal because a sister News Corp. unit engaged in unseemly behavior. But consider this: In the midst of this scandal, News Corp. decided to pull out of its effort to acquire the rest of BSkyB, the satellite television system of which it already owned 39 percent. As Reuters noted:

"While there was no clear legal obstacle to letting the bid proceed via a regulatory review, having won informal government blessing some time ago, even Murdoch's dramatic closure of the scandal-hit News of the World tabloid had failed to stem public anger, leaving the $12-billion buyout politically untenable."

In other words, Murdoch was forced to abandon what would have been a highly lucrative move for the company not because he lacked the financing, or the regulatory approval, but because he lacked the social license.

Daniel Gross is economics editor at Yahoo! Finance.

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm.

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