The Business Side of History

How is the war in Ukraine changing corporate calculations? Neil Malhotra on the new weight of moral issues in global commerce. Exit Strategy How is the war in Ukraine changing corporate calculations? Neil Malhotra on the new weight of moral issues in global commerce. [Jannes Glas] Jannes Glas Multinational corporations are giving up billions of dollars in Russia, as they cut back operations there in response to Moscow’s invasion of Ukraine. Of almost 1,100 firms tracked by Yale University, more than 750 have voluntarily scaled back business beyond the requirements of international sanctions—and the choice, in many cases, carries serious costs: BP estimates it will lose $25 billion in revenue; Shell, $5 billion. These public decisions to side with Ukraine follow years of corporations increasingly taking liberal or progressive political positions on divisive cultural issues, including voting rights, rights for gay and transgender people, and the Black Lives Matter movement. But corporate leaders knew those moves wouldn’t cost them substantially, because few consumers consider corporations’ social and political stances when buying goods or services. So why are these companies willing to forgo billions of dollars now? Neil Malhotra is the director of the Center for Social Innovation and a professor of political economy in the Graduate School of Business at Stanford University. A few executives, Malhotra says, acted on intuition to get out of Russia early, and then a cascade effect developed, with others not wanting their companies to be seen going against an apparent global consensus on a historic issue. According to Malhotra, corporate calculations on social and political stances have changed since Donald Trump became president of the U.S.—but they haven’t changed fundamentally. Businesses are still driven by financial considerations above all, and the decisions to get out of Russia are based on a judgment that leaving is the better move to ensure long-term profits. But it also sets a precedent, Malhotra says, with unknown implications across an array of fraught social and political causes. ——— Michael Bluhm: Why are corporations going beyond their legal requirement to cut ties in Russia? Neil Malhotra: It’s a fascinating situation. Corporations are going far beyond government sanctions. They’ve left real money on the table. Russia is a significant market that they’re not serving anymore. The situation reached a tipping point. If you’re not leaving Russia now, you won’t be seen as a legitimate company—and that’s going to get you effectively on a blacklist among consumers, potential employees, investors, and so on. It’s an example of how society as a whole coordinates on an issue, and companies don’t want the impression that they’re on the wrong side of it. Since 2020, every single proxy statement—in which a corporation must publicly provide shareholders relevant information about it before any shareholder meeting—has a section on diversity, equity, and inclusion, and a section on environmental, social, and governance policies. If you don’t have that in your proxy statement, you’re viewed in society as an illegitimate company. This corporate reaction to the war is even stronger. It’s not just propaganda or PR in a proxy statement; it’s leaving money on the table. Bluhm: Why are some organizations choosing to stay in Russia? [Advertisement]( Advertisement Malhotra: There are ethical reasons to stay. If you’re a pharmaceutical or a medical-device company, your decision to leave could put innocent people’s lives at risk. Other companies, such as FedEx or UPS, also provide essential services but have decided to leave anyway. Some could argue that there’s a lot of innocent Russian people, including people who’re protesting or against the regime’s activities, who would be punished by these departures. Unlike the Biden administration’s sanctions, these departures are not surgical—they restrict goods or services from an entire country of people, many of whom are innocent. It’s one thing to say Nintendo won’t sell any games there; that’s not a necessity. It’s quite a different thing when a necessity isn’t available to the market. [Illia Kholin] Illia Kholin More from Neil Malhotra at The Signal: “A firm like McKinsey depends on legitimacy. [McKinsey is a major global management consultancy.] If they were stepping out from the herd and saying, We’re going to continue providing services in Russia, it could jeopardize their standing among Fortune 500 and other multinational companies. And the cost for those companies of switching from McKinsey to another management consultant, like Bain or Accenture, is very low. They’re all reading the writing on the wall. You can view leaving Russia as leaving $5 billion on the table, or you can view it as buying a $5 billion insurance policy against losing your status in global society.” “The Ukraine crisis was very quick. You don’t have time to do a three-month study on how you should respond to the war. The situation is fast-moving; it’s been changing day-to-day; and CEOs have had to depend on gut feeling. They’ve had to make snap decisions. That’s where these tipping points can occur. If you have a few people making quick choices, then others’ can come rapidly in turn: Okay, we’ve got to join the herd. A lot of this isn’t based on data-driven research; it’s a judgment call. In this case, the Yale list was a catalyst because it’s a coordinating mechanism. Other companies made the decision to leave, and then it was a flood of companies leaving.” “It’s interesting that a lot of major non-Western powers, such as China and India, haven’t taken a clear side on this conflict. Is this a harbinger of a global schism in the corporate community? Companies could move out of Russia and not have too many difficulties, but Taiwan is the semiconductor-chip capital of the global economy. If China threatens it, how would the global corporate community react? This current war does set a precedent, but Taiwan would be a much tougher test.” ——— ——— Publishing in public beta since 2021, [The Signal]( explores urgent questions in current events around the world. 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