The Russian Invasion of Ukraine: A Lesson in Stakeholder Capitalism?

Peter Essele is Vice President of Investment Management and Research at Commonwealth. This post is based on his Commonwealth memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? both by Lucian A. Bebchuk and Roberto Tallarita; and For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID, both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

It’s possible that the autocratic regime in Russia didn’t fully appreciate the power of stakeholder capitalism. In the wake of the invasion, stakeholders have clearly chosen sides—and they do not include the Kremlin. Corporations have responded, and many have decided to sever Russian ties through divestment. Shell and BP recently announced their intention to abandon their involvement in Russia. Further, Sberbank (Russia’s largest lender) says it is leaving the European banking market in the face of Western sanctions against Moscow.

The actions are a clear signal that the world is pivoting toward a stakeholder capitalism model, one that is designed to benefit all parties. Those parties include customers, suppliers, employees, shareholders, and, most importantly, communities. Stakeholder capitalism proponents argue that serving the interests of all stakeholders, as opposed to only shareholders, offers superior long-term success to businesses. Many believers assert that it is a sensible business decision, in addition to being an ethical choice.

Shareholder Primacy Vs. Stakeholder Capitalism

For decades, shareholder primacy has reigned, which is the notion that corporations are only responsible for increasing shareholder value. In that model, profits are maximized at all costs through open and free competition without deception or fraud. Put simply, corporations are solely motivated by profit potential. End of story.

The recent events in Ukraine highlight a clear evolution beyond the shareholder primacy model, as evidenced by first-movers like BP and Shell, which have placed social good over profits. The decision to divest of Russian assets and partnerships places social responsibility over short-term profits (especially as oil prices skyrocket globally). It’s also a move that’s aligned with long-term, sustainable value creation in an investment environment that places significant weight on intangibles like brand reputation.

If the shareholder primacy model still dominated the corporate and investment world, it’s likely that firms such as Shell and BP would have simply weathered the negative public relations backlash until the Russia-Ukraine episode was in the rearview mirror. In that case, the profit potential and subsequent increase in share price (due to the rise in oil) would’ve helped placate investors, and they would have brushed off the impartial stance taken by the two firms. Thankfully, for humanity’s sake, that world is shifting quickly in favor of stakeholder capitalism, as Larry Fink points out in his prescient 2022 Letter to CEOs.

Recent events have highlighted that stakeholder capitalism and profit maximization are not mutually exclusive outcomes. In fact, they’re very closely aligned, particularly as one’s time horizon increases.

Russia Exposure and PPS Select

As stewards of more than $12 billion in client assets (as of March 3, 2022), Commonwealth has clearly taken note of recent events and how they could potentially affect clients’ long-term goals. As fiduciaries, we are obligated to make decisions in the best interest of clients, which includes maximizing returns for stated levels of risk. It’s why we’ve had many discussions in recent days to discuss the impact to clients as the situation unfolds, particularly as it relates to Russian exposure across portfolios.

Within our Preferred Portfolio Services® (PPS) Select asset management platform, Russian exposure is minimal, and we expect it to decrease further over the coming weeks. Many of the asset managers we’ve spoken to have plans to divest, and we’re hopeful that direct Russian investment will be nonexistent when underlying holdings are released in the next reporting period. Any Russian exposure that remains will likely be the result of illiquidity, where names remain in the portfolio in small portions because of an inability to sell on listed exchanges.

MSCI and FTSE Russell recently announced their intention to cut Russian equities from widely-tracked indices, as they’ve been deemed uninvestable. As a result, we expect our passive models to be largely void of Russian exposures as well in the coming months.

While some investors may consider Russian equities an investment opportunity, we would caution against this approach at this time, as the previous comments suggest. The public continues to push global exchanges to delist Russian-domiciled firms, so it’s very likely that buyers will be left empty-handed without a liquid market. The result would be ruin, as opposed to other geopolitical value opportunities in the past that have presented a more attractive risk/reward scenario. At this time, investors are faced with a boom or bust scenario, skewed mostly toward the latter.

Looking Beyond Investments

From an investment perspective, we remain vigilant as the situation continues to unfold, and we will continue to do what we feel is in the best interest of clients. As mentioned, we are in regular contact with asset managers to understand their position and will react accordingly if it differs from our own.

Finally, our hearts go out to all those affected, directly or tangentially. The discussion of exposures, markets, and profits feels petty when viewed in contrast to the struggle that many of our fellow global citizens face daily. It can be difficult to put on a straight face at times like this when humanity is clearly not okay. Let’s all hope for a resolution where calmer heads prevail.

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2 Comments

  1. Fred Nickols
    Posted Thursday, March 17, 2022 at 1:44 pm | Permalink

    All of which suggests replacing the Balanced Scorecard with what I call a “Stakeholder Scorecard.”

  2. LC Manoj
    Posted Thursday, April 14, 2022 at 1:00 pm | Permalink

    This line resonated with me “Recent events have highlighted that stakeholder capitalism and profit maximization are not mutually exclusive outcomes. In fact, they’re very closely aligned, particularly as one’s time horizon increases.”

    Wanted to share this nugget with you: The Tata Group, founded 150 years ago is a $100+ billion conglomerate today, and is headquartered in India. The founder of the Tata group said this 100+ years ago “In a free enterprise, the community is not just another stakeholder in business, but is in fact the very purpose of its existence.”

    True to this ethos, the Tata Group is one of the biggest philanthropic business houses in India, having built most of modern India. The Tata Group is a proof point for your statement – in terms of stakeholder capitalism and profit maximization being closely aligned as time horizon increases.

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