6. Reputational and practical risks
6.1. Risk and Responsibility
More than fifty years have passed since Nobel Laureate Milton Friedman in 1970 posited in the New York Times Magazine that “The social responsibility of business is to increase its profits”. Today, most business leaders would agree that much more goes into their duty of corporate responsibility, which defines success just as much as product or service delivery. In today’s open and critical social environment, businesses must earn and protect their reputation among customers, investors, and employees. A strong reputation increasingly determines a company’s competitive edge, just as a damaged reputation may induce massive loss. Between the 2001 Enron failure and the 2023 Mondelez boycott call, the world has witnessed hundreds of cases reminding corporate managers of the key criticality of corporate reputation.
Russia’s attack on Ukraine in February 2022 brought back the era of large-scale war in Europe, and with it the risk to businesses of unwillingly aiding the Russian war effort via trade. In August 2023, a leading newspaper revealed how German components had been found in the type of Russian missile that killed 23 civilian Ukrainians a few months earlier, bringing scrutiny to the relevant CEO over his company’s responsibilities. Any company may at any time become the subject of investigations by media or civil society organizations, which possess increasingly sophisticated tools to uncover corporate activities in investment or trade.
Apart from attracting or alienating customer confidence, reputation determines whether a company may attract future talent. Even more, institutional investors increasingly focus on corporate reputation, ethical standards, and legal compliance, often built into their portfolio engagement standards. Many private investors also consider ethical behavior as an indicator of corporate health: companies that skillfully manage and control their reputation are more likely to manage and control other business areas. Finally, a strong reputation enhances customer loyalty and support in a way that may increase company endurance during times of crisis.
Since Russia's invasion of Ukraine, prolonged business presence in Russia has often increased domestic pressure on companies to leave, which again has increased the likelihood of an unfair or enforced takeover of assets by Russia - as experienced by Danone and Carlsberg. Apart from business presence, trade with Russia may also pose a direct risk to profits. In many European jurisdictions, companies risk hefty fines for violating sanctions regulations, sometimes under criminal justice. For companies that operate in the United States, grave violations or circumventions may lead to secondary sanctions that close off the US market. Such measures will almost certainly incur significant reputational costs and risks of further deterioration of relations with key stakeholders.
Companies seeking market shares or reconstruction deals in Ukraine will probably find that a record of non-compliance with sanctions may close those future avenues. The Ukrainian government maintains extended sanctions lists and maintains a list of sponsors of war, a de-facto blacklist of companies, including several Western companies. Companies that have supplied dual-use or battlefield-relevant technology to Russia, however indirectly and unwillingly, may face more grave repercussions from Ukraine, including war-crime complicity cases or class action from citizens. The ensuing legal conflicts may haunt a company for several decades, as seen with enduring class action cases concerning South Africa.
Violations of sanctions against Russia are sometimes visible (e.g. through customs and export data, as described in chapter 3 above), and new violations are frequently being exposed by investigative media and activists. Journalists work together across borders to unveil the most complex networks of sanctions circumvention and violation, including well-hidden oligarch assets. Russian journalists in exile add significant expertise and insights to such investigative projects. In addition to hundreds of journalists, a similar number of activists come together to systematically investigate companies, like Mondelez.
The main global campaign addressing companies directly is the B4Ukraine Coalition, which has by late September sent 125 letters to companies pressuring them to decouple from Russia. The Squeezing Putin network organizes activists who systematically investigate hundreds of companies. Beyond these platforms are countless local watchdog groups, such as Boycott Russia, which provide name-and-shame lists to consumers, or the Heartland Initiative which targets producers of digital components. Any Western company may become subject to scrutiny from these or other watchdog networks of activists.
The Heartland Initiative deserves specific mention. This organization mobilizes investors to pressure their portfolio companies to stop violations and circumventions of sanctions, rallying almost 17 % and 20 % of the votes behind critical motions at the latest annual shareholders’ meetings of Microchip Technology and Texas Instruments, respectively. They request companies to enhance their due diligence efforts related to business in conflict-affected and high-risk areas.
The rise of sanctions as an international human rights instrument, and the transformative nature of the unprecedented Russia sanctions, are affecting business. Investors may increasingly express expectations about compliance with sanctions regimes. As compliance with sanctions against Russia is exposed to increasing scrutiny from governments, critical media, and civil activist networks, the importance of compliance with legal and customer expectations can hardly be exaggerated.
Corporate responsibilities are not carved in stone; there is no agreement as to exactly what a company's corporate responsibilities are. Just as the exact legal responsibilities may be hard to fully identify, the ethical and moral responsibilities of businesses in wartime are even harder to accurately define and agree upon. Different people will expect different things from corporations - and judge them based on how companies live up to what they personally think should be expected. This makes reputation management and risk mitigation increasingly complex and difficult.
With war and increased international tensions, political processes become more important to business, too. Companies must deal with them not only in the form of new laws and regulations, but in the form of new expectations from political stakeholders alongside customers, employees, and the general public.
6.2. Recommendations for business
Faced with the high legal and reputational risks from direct or indirect trade with Russia, companies may improve risk mitigation in the following five ways:
1. Enact and enforce policies that stipulate clear respect for human rights and an understanding of the sanctions regimes and requirements applicable to the company, and communicate those obligations to employees throughout the organization, including sales and other units directly at risk of inadvertent violations. Policy enforcement includes the necessary capacities for compliance monitoring, and a secure environment for internal reporting and whistle-blowing.
2. Be transparent, honest, and sincere in all communication with customers, partners, employees, and other stakeholders. Share information and welcome feedback when issues or difficulties occur. Build robust strategies for open and meaningful communication. Think through, beforehand, how to manage and remedy a situation where the company becomes entangled in networks of sanctioned trade with Russia or Russian entities.
3. Avoid unethical behavior, conduct real and open-ended discussions of the company’s moral responsibilities, in addition to strict legal obligations. If possible, invite external experts to take part in such internal deliberations, to bring fresh eyes and perspectives to complex assessments.
4. Perform comprehensive due diligence and monitoring of the company’s trade relations with Russia, Russia’s neighbors, and countries known to exchange substantial trade with Russia. The need for due diligence increases if the company produces dual-use goods, battlefield-relevant commodities, digital or mechanical technology, and similarly sensitive technologies. High-risk trade partners do not only include Russian companies, but also third-country companies that frequently trade with Russian companies.
5. Remain updated with existing sanctions lists and regulations, or secure advice from external experts that have an updated overview of such frameworks.
Sanctions on Russia are political by nature; they are forged by compromise among political representatives. This has the effect that sanctions constantly change and expand, presenting particular risk to companies that rely on value-chains involving Russia. Therefore, monitoring the political process is of key importance to be able to foresee risks and regulations behind the next corner.
The war in Ukraine is the most defining fight for Europe's future since 1945. Most experts believe the situation will get worse before it gets better. This makes it natural to expect that the sanctions will also become stricter. It will not suffice to answer "we didn't know" or "the rules were so unclear" when confronted in the future with the consequences of past sanctions violations.