The swift – and not-so-swift – decisions being made by global brands and smaller companies alike to pull out of Russia might appear to signal that a battle of extremes is waging in board rooms across the globe between practical/financial concerns and adherence to philosophical principles. The choice is being portrayed as one pitting potentially crippling financial impacts to the company and its shareholders on the one hand, to fulfilling the company’s oft-highlighted ethical responsibilities on the other.

Our research and experience tell us, however, that these two seemingly opposing factors challenging corporate leadership today are – in fact – inextricably intertwined and aligned in ways that are not often recognized by the casual observer.

The “New” Corporate Role in Global Affairs

Our analysis of the increased importance and heightened role of Corporate Social Responsibility (CSR) reveals a world in which Environmental, Social, and Governance (ESG) ratings have become a core determinant of corporate policy and management action. ESG is an investment community rating based on considering all relevant stakeholders, and – unsurprisingly – many of these stakeholders are institutional investors with significant clout and influence over the firms that they invest in.

To be clear, academic research has long found that companies that are the most socially responsible also deliver the highest financial performance. Investors have found that higher ESG scores translate into improved profitability, lower employee turnover and better relationships with the legal and regulatory community. So, the decision to exit Russia may actually be financially beneficial in many ways.

Consider:

1. The days of companies saying they serve only financial stakeholders are long gone. Society’s expectations for companies have changed considerably since Coca-Cola continued to sell drinks in Germany immediately prior to World War II and Heineken continued to brew beer in Rwanda during the mid-1990’s as claims of mass-genocide took place there. To be fair, both of these instances were decades ago and this time around, both companies have said they will suspend their operations in
2. That said, reputable brands cannot afford to be associated with gross acts of terror and potential criminal behavior launched upon innocent women, children, the elderly and those attempting to protect their freedoms from the Russian invasion.
3. The visibility of these atrocities can neither be understated nor avoided: Most people in the world have not seen 24 hours a day broadcasts of behavior so egregious and reprehensible from one country upon another for no rational or provoked reason since World War II. This heightened visibility of this conflict matters to a company’s brand equity and corporate reputation – a lot.
4. Successful firms strive to maintain an ethical organizational culture. Continuing to have a business presence in Russia could violate global ethical norms that could jeopardize the company’s reputation and result in boycotting, protests, employee uprisings and other visible attempts to make others aware of the company’s association with gross misconduct.
5. Importantly, staying in Russia would likely lower a firm’s ESG score and ultimately lesson their desirability to investors. While these moves to distance themselves from their Russia operations may appear to be predominantly moral ones, there are underlying factors at play that may help to explain this confluence of objectives.

Steps for Moving Forward

Any U.S. or NATO member firm that stays in Russia is rolling the dice that consumers, employees, competitors, investors, communities, and regulators may take significant action that negatively impacts their firm. While governments have so far been resistant to putting ‘boots on the ground in Ukraine’, companies can immediately join governments in negatively impacting Russia’s economic situation due to Russia’s unprovoked incursion into Ukraine.

How can companies navigate these unprecedented waters?

1. Most companies with operations in Russia should suspend or exit their business activities if they are concerned about important stakeholder opinions and support. Consumers in the U.S. have been clear that they want to support the Ukraine people, particularly after hearing President Zelensky’s pleas to Congress asking companies to stop doing business in Russia.
2. Shareholders and financial institutions are watching company actions very carefully concerning Russia. Companies that do not exit Russia may not only face investors dumping their stocks, but risk long-term defections by investors due to the inhumane acts brought forth by Russia on Ukraine. A recent Fortune article presented CNBC data showing that companies staying in Russia saw their stocks drop 15-30% in one day while the market fell only 2-3% points. See list of companies leaving Russia is holding those who stay accountable | Fortune).
3. Suppliers could terminate their relationships with companies operating in Russia if they felt strongly about having their support of U.S./NATO involvement in Russia publicized. While a company might want to continue operations in Russia, a lack of supply chain support could quash those plans.
4. In addition, companies that stay in Russia need to be mindful that government regulators in the legal home of their respective corporate headquarters or in-country operations will very likely scrutinize their compliance with regulatory community mandates.
5. Companies need to think long term. If you have ownership of your businesses in Russia, you may want to return, at some point in time, and how you treat your employees throughout this process with define your chances for long term success via possible re-entry. As an example, McDonalds operates over 850 restaurants in Russia – the vast majority of these are corporate-owned. The company made the decision to close operations in Russia for the time being, but continue to pay employees in the near term, both in Russia and Ukraine.

Bottom Line?

Don’t think you can continue operations in Russia and make philanthropic donations to ‘make up’ for this behavior. The eyes of the world are watching who is staying, who is leaving and how quickly these companies come to terms with their decision.

Whatever ways a given company chooses to act, that decision will have significant, long-term implications that will extend well beyond the current conflict.

So, choose wisely.

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