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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

(Originally published 2022 | 04.19)

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.

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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?

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.

Bluhm: In recent years, some leading voices in the corporate world have called for a move from shareholder capitalism to stakeholder capitalism, which would include more consideration for workers, suppliers, and local communities—and give greater priority to concerns beyond the bottom line, such as the moral questions at stake in Ukraine. How do you understand that shift?

Malhotra: The terms of stakeholder capitalism get muddled a lot. All these companies are fundamentally shareholder-focused companies. What’s at stake is the mechanism for achieving shareholder value.

This idea of shareholder value itself was popularized by Milton Friedman in the 1970s and by former CEO of GE Jack Welch in the ‘80s. You have to understand the time period; it was characterized by American companies being uncompetitive internationally and by stagnation in the American economy. It was considered immoral that companies were not looking out for their shareholders, because the shareholders own the company. When managers are not doing a good job, it’s bad for American capitalism; it’s essentially stealing money from shareholders. Today, a lot of people look back on shareholder value as an immoral thing. But the people advocating for it had moral arguments.

Stakeholder capitalism is the idea that you can’t be myopically focused only on shareholders and think only in the short term, but you have to realize that taking into account the interests of other stakeholders is a good vehicle for long-term shareholder value. It’s basically an enlightened, less myopic form of shareholder capitalism.

Companies have to care about certain constituencies more than they did. I don’t think there’s a lot of evidence that consumers care much about this stuff, but elite constituencies do. These can include investors, suppliers, employees, as well as activist groups, interest groups, and the government. These are all sources of risk for companies, so they have to account for these stakeholder interests, if they want to achieve long-term shareholder value.

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.”

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