Corporate Self-Sanctions

Following the Russian invasion of Ukraine, some companies left Russia while others remained. What explains the difference in these company decisions to postpone new investments or projects, close their stores, suspend operations, and even exit Russia altogether? In my draft article, ‘Corporate Self-Sanctions,’ I explain these ‘stay or leave’ decisions with reference to demand and supply factors.

Demand-side Factors

Demand factors for corporate self-sanctions refer to pressure imposed by corporate stakeholders to take or refrain from certain acts in response to the Russian government’s conduct. Demand factors are a popular explanation for company exit decisions because the sources of pressure can be quite visible: Consumers take to social media to threaten boycotts against companies that refuse to leave. Investors and civil society actors publish online action letters reminding companies of their responsibilities under international guidelines. Governments announce sanctions restricting or eliminating business opportunities.

            But demand factors alone cannot explain ‘stay or leave’ decisions because companies that share similar stakeholder pressure, such as from a common consumer base, still chose different responses to the Russian invasion. For example, some fast food chains suspended their operations following the invasion and subsequently exited the Russian market. In contrast, some of their competitors chose to keep their stores open with no immediate plans to exit. Consumer preferences do not explain these differences because it is hard to believe that consumers of the former company cared more about the invasion compared to those of the latter. In reality, the same consumers likely purchase from both companies.

Supply-side Factors

Instead, the explanation of why companies stayed or left—or chose some intermediate position—depends on supply side factors that facilitate or inhibit a company’s ability to comply with the values and preferences of its consumers and other stakeholders. In my paper, I highlight the following supply side factors that may explain why companies ‘stay or leave’ in a crisis:

• Business model used for operations
• Board governance of conflict-related risks
• Contract provisions that enable or restrict suspension of performance obligations
• Political risk insurance and international investment dispute resolution
• Organizational preparedness for crisis response, including strategic partnerships with inter-governmental and non-governmental organizations

These supply side factors provide important lessons for corporate managers investing in crisis-preparedness.

First, business managers will need to re-evaluate business models based on the potential for centralized crisis policymaking. A business’s ability to suspend or terminate its operations depend on whether its business model allows for centralized or decentralized decision-making regarding business suspension, termination, and exit. For example, the Russian conflict highlighted the ways that a franchise model may enable or limit the ability of a business to respond to a crisis through operational suspension or termination. Some businesses explained that they were able to scale back or terminate their business in Russia because they directly owned the stores or their licensed partners cooperated with their decision to do so. In contrast, other companies claimed that their licensed partners refused to cooperate with plans to suspend stores.

Second, managers will also need to evaluate whether their contracts include provisions that can provide them with flexibility to respond to a conflict situation—even if they choose to retain a business model that is fraught, such as a franchise model.

Third, a company’s board governance will also influence its willingness and ability to self-sanction. Particular factors include director expertise on international issues, identification and allocation of oversight for conflict-related risks, including reputational risks, and investment in long term policies and practices that encourage a strategic rather than reactive response to a crisis. A business’s self-sanctioning behavior may also depend on whether any losses associated with such sanctions can be recovered through investment agreements or political risk insurance, among other strategies.

Fourth, many companies gained international attention by offering aid to those affected by the Russian invasion, such as provision of food, housing, relocation services, and other forms of humanitarian assistance. In many of these examples, there is a close nexus between the aid offered and the products and services sold by the company: Airbnb offered housing assistance. Travel companies offered assistance in transporting Ukrainian refugees to safety. The nexus between humanitarian need and a company’s business lines suggest that companies in particular industries can predict that they will be under the spotlight when the next crisis emerges. Humanitarian relief assistance should be a priority for two types of companies.

• Brand companies should be on notice that consumers, employees, media, and other actors will be watching them closely to see what aid they offer to those affected in a crisis. By their size, resources, and name recognition, these companies are unlikely to avoid the societal expectation to do something.  
• Expectations are also high for those companies that operate in industries whose products and services may prove crucial in a natural disaster or armed conflict. This concern is particularly significant for those companies in industries that trade in life-sustaining products and services, including food, water, shelter, clothing, and medicine, or provide transportation for the same.

In order to prepare for these crises, companies may seek out partnerships with inter-government actors or non-governmental actors who can provide critical expertise in crisis preparedness, aid in the delivery of supplies, or even collaborate on strategic initiatives that involve the core business of the company.

Kish Parella is a Professor of Ethics and Law at the Washington and Lee University School of Law.