Staying Reputable On Russia

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This historic global crisis has revealed gaps in management's ability to deliver on promises made regarding doing business in Russia. Here's how boards can help.

Yawning gaps in global governance have been revealed by the efforts of U.S. companies to curtail or halt their business with and investments in Russia following the country’s bloody, unprovoked attack on Ukraine. As has been widely reported in the international media, I led an interdisciplinary team of 42 researchers with mastery of 12 languages, including many on the ground in Eastern Europe, in tracking the corporate pledges being made and how well companies were living up to them.

Many business leaders took action because they did not want to be associated with the mass slaughter of thousands of innocent Ukrainian civilians. The curtailment of intertwined supply chains, the disruption of information pipelines from Russia and the halt of site inspections also raised shareholder risks. 

Yet, this historic global crisis has revealed massive gaps in management’s ability to decide on and take appropriate action regarding doing business with and in Russia, as well as boards’ ability to provide effective oversight of those actions.

In a recent client letter, the law firm Wachtell, Lipton, Rosen & Katz warned, “As companies continue to manage the consequences of the war in Ukraine…corporate governance committees remain as crucial as ever.” But the 257 pages that followed detailed only issues related to compliance with the regulatory bodies and standard risk factors, missing such worrisome governance pathologies as:

1. Diversionary Delays

Committing to a clearly articulated course of action is essential. Indefinite, insincere “reviews” and “evaluations” do not help the company. It’s also obvious to investors, consumers and media that these are nothing more than stalling techniques. 

For example, a huge U.S. paper company claimed to have only a passive interest in a Russian partner when, in fact, it owned 50 percent of the business, with nearly half the partnership’s operational oversight board made up of its own company executives.

When this came to light, the U.S. company promised a “strategic review of options” to divest the Russian operations in early March—yet all substantive operations are continuing. 

2. Denying Documented Activity 

A premier audio headset company proclaimed publicly that its stores were “essentially closed” in Russia, yet our researchers were able to not only call Russian stores but to complete purchases a month after the initial statement of withdrawal. A major shoe maker claimed to have quietly shut down its business in Russia, yet its merchandise was still in Russian stores, branded with their marquee signs. The CEO of a global car rental company claimed during a CNBC interview to have shut down all of its Russian operations, yet we were able to rent a car from a Moscow operator the very next day.

3. Strategic Smoke Screens 

Even after pledging to take action, management teams sometimes stall or make excuses in the hope of making it through to better days. However, this tends to backfire, incurring reputational harm and stakeholder wrath that builds the longer the company fails to take action. 

Companies that release misleading public statements boasting about plans to curtail never-before-mentioned future investments or that do the bare minimum to comply with global sanctions risk appearing hypocritical. 

For example, a major chemical company still claims, with no justification, that its employees would be at greater risk than millions of idled employees from other firms.

Furthermore, some franchisors argued that they were unable to shut down operations in Russia due to contractual arrangements that gave too much legal control to locally owned franchisees. However, others, including Starbucks, resolved this by financially supporting Russian-based franchisees in order to live up to their commitment to shut them down.

At a time when employees, consumers and investors are increasingly concerned about geopolitical governance issues, boards must, through committee oversight, ensure that hidden and/or indirect Russian exposure is not papered over by intentional obfuscation, hedging or legal threats. It’s not only the right thing to do, it’s the right thing for business.

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