Corporate Response to the War in Ukraine: Stakeholder Governance or Stakeholder Pressure?

Anete Pajuste is Professor of Finance at Stockholm School of Economics (Riga), and Visiting Senior Fellow at the Program on Corporate Governance of Harvard Law School; and Anna Toniolo is Postdoctoral Fellow at the Program on Corporate Governance of Harvard Law School. This post is based on their recent paper, forthcoming in the Emory Corporate Governance and Accountability Review.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

In the aftermath of the Russian invasion of Ukraine on February 24, 2022, hundreds of Western companies have taken the unprecedented step of withdrawing from Russia, going beyond compliance with regulations and sanctions. The corporate reaction to the invasion of Ukraine has been widely understood as “a clear signal that the world is pivoting toward a stakeholder capitalism model”, claiming that managers placed social responsibility over profits. Others have instead questioned the authenticity of corporate support for Ukraine, arguing that companies left Russia mainly driven by operational and reputational concerns.

In a new paper, forthcoming in the Emory Corporate Governance and Accountability Review, we empirically investigate the corporate response to the Russian invasion of Ukraine through the lens of the stakeholder governance debate. We explore whether or not the managerial decision to withdraw business from Russia was adopted according to a stakeholder approach, meaning that corporate leaders decided mostly on ethical and moral grounds, even at the cost of deviating from shareholder interests. An alternative hypothesis posits the existence of a different possible channel, such as firms’ exposure to Russia or stakeholder pressure exercised on companies to leave Russia. To this aim, first, we examine the relationship between company revenue exposure to Russia and the speed of the announcement to withdraw or suspend Russian operations. The findings indicate that firms which quickly announced their withdrawal from Russia actually had little revenue exposure to the aggressor country. Furthermore, we conduct a Twitter-based test of the virality of boycott campaigns and investigate their relationship with managers’ decision to take positive action in supporting Ukraine and exiting Russia. Our results reveal a strong positive association between boycott campaigns against businesses and their decision to withdraw from Russia. Finally, our study underscores important differences across market sizes. The smallest companies in our sample (mid-cap companies) present on average the largest revenue exposure to Russia, but at the same time receive the least attention from Twitter boycott campaigns. Overall, our results suggest that the discretion of corporate leaders in considering ethical concerns poses risks of “woke-washing,” that is using social activism as a marketing tool to obtain positive returns. The findings also confirm that pressure from stakeholders—magnified by the use of social media—can successfully influence the corporate decision to pursue certain social goals and not only profits.

Here is a more detailed account of our analysis.

After introducing our subject, we survey the current heated debate on stakeholder governance and the need for companies to be managed for the benefit of a broader set of stakeholders and not solely for profit maximization. Advocates of stakeholder governance view the political process as incapable of addressing corporate externalities; hence they rely on the discretion of managers to make business decisions that increase stakeholder welfare. Meanwhile, critics of stakeholderism respond that inevitable and pervasive trade-offs exist among stakeholders, and that leaving corporate leaders without a standard for choosing among competing interests simply insulates them from accountability. In this paper, we use the corporate reaction to the invasion of Ukraine as a setting to test stakeholder governance.

First, we present the timeline of events and decisions that followed after the outbreak of the war and review the different channels that impacted Western businesses operating in Russia. The array of sanctions imposed on Russia, while allowing most Western firms to continue their business in Russia, created certain operational difficulties. Additionally, companies that decided to stay in Russia started to face mounting pressure from multiple stakeholders. Both the USA and the EU have witnessed an extraordinary public consensus over supporting Ukraine and sanctioning Russia with severe economic measures. This public support has translated into political pressure on Western companies to leave Russia in order to avoid benefitting the Russian economy. People worldwide also used social media to monitor and punish companies that kept doing business with Russia. Finally, the stock market seemed to reward companies that left Russia while penalizing those that stayed.

Second, we document the different measures taken by Western corporations in response to the assault on Ukraine: some companies promptly made a clean break, some only suspended a significant or a minor portion of their business in Russia, while others largely continued to operate as before. Furthermore, we report the range of different public statements that corporate leaders released to explain the reasons behind their response. Interestingly, we notice that they referred to the interests of stakeholders both whether announcing their decision to leave Russia or making the opposite decision to stay.

In our empirical analyses, we use a sample of companies included in the S&P 500 and STOXX Europe 600 indices and examine company revenue exposure to Russia, as well as boycott campaigns against our sample companies during the sixty-day period after the Russian invasion of Ukraine. With respect to the speed of withdrawal from Russia announcements, we use the announcement dates from the designated project page at the Yale School of Management. We document a negative relationship between the speed of the announcement to withdraw or suspend Russian operations and company revenue exposure to Russia, i.e. the average revenue exposure to Russia of early announcers is smaller than that of the non-early announcers. Furthermore, we design a Twitter-based estimate of pre-announcement boycott campaign virality and relate this estimate to the potential impact on company actions with respect to leaving or staying in Russia. The results show a significant positive association between firm-specific boycott campaign virality and the decision to withdraw from Russia. Finally, we find that the smallest companies from our sample (mid-cap companies) are having higher revenue exposure to Russia, while Twitter boycott campaigns concentrated mainly on bigger firms (large and mega-cap firms).

The implications of our results for the stakeholder governance debate are threefold. First, the empirical evidence showing that corporations quickly took a stance in leaving Russia when they had little financial exposure suggests an attempt by some corporate leaders to engage in so-called “woke-washing”. These marketing moves likely pushed other firms with larger exposure and higher shareholder value at stake to make an announcement perhaps earlier than they would have wished, given the complexity of the situation. Second, Twitter-based boycott virality measures reveal the essential role that the boycott campaigns played in convincing companies to cut ties with Russia. These findings contribute to the literature on corporate boycotting, highlighting their effectiveness in pushing companies to pursue social goals in terms of communicating about people’s social preferences. Moreover, the empirical evidence supports and reinforces the hypothesis that stakeholder pressure on managers to respond to their social preferences can orient business decision-making. Third, our empirical analysis sheds light on the importance of firm size in the stakeholderism debate. The result that stakeholder boycott campaigns focused on larger firms, while revenue exposure to Russia was higher among smaller firms highlights the existence of a “Stakeholder Governance Gap”; stakeholders are willing to pressure large and high-profile firms, while smaller public companies are less scrutinized. This evidence is similar to the stark “Corporate Governance Gap” found between large and small corporations.

The complete paper is available for download here.

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