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

• Publication year: 2022

Corporate Response To The War In Ukraine: Stakeholder Governance Or Stakeholder Pressure?

Anete Pajuste
Stockholm School of Economics in Riga, apajuste@law.harvard.edu

Anna Toniolo
Harvard Law School, atoniolo@law.harvard.edu

CORPORATE RESPONSE TO THE WAR IN UKRAINE: STAKEHOLDER GOVERNANCE OR STAKEHOLDER PRESSURE?

Anete Pajuste^*

Anna Toniolo^**

ABSTRACT

This Article empirically investigates the corporate response to the Russian invasion of Ukraine in the framework of the stakeholder capitalism debate. Some describe corporate leaders' decision to withdraw from Russia as an example of stakeholder governance, maintaining that they placed social responsibility over profits. Others question the authenticity of corporate support for Ukraine and argue that companies left Russia mainly driven by operational and reputational concerns.

Against this backdrop, we conduct an empirical study of reactions to the outbreak of the war from companies in the S&P500 and STOXX600 indices. We explore whether managers effectively decided mostly on ethical and moral grounds, or whether perhaps there was another possible channel. In particular, we focus on assessing the role played by stakeholder pressure exercised on companies to leave Russia.

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First, we examine whether revenue exposure to Russia was associated with the corporate decision to withdraw or suspend Russian activities, and the speed of the decision's announcement. The findings indicate that firms which quickly announced their withdrawal from Russia actually had little revenue exposure to the country. Furthermore, we conduct a Twitter-based test of the virality of boycott campaigns and examine their relationship with managers' decision to take positive action in supporting Ukraine and exiting Russia. Our analysis shows that the decision to withdraw from Russia is significantly positively associated with boycott campaigns. Finally, our research underscores important differences across market sizes. The smallest companies in our sample (mid-cap companies) are on average the most exposed to the Russian economy, whereas the Twitter boycott campaigns concentrated markedly on bigger firms (large and mega-cap firms).

Overall, the evidence presented in this paper suggests that corporate leaders tend to promote stakeholder interests when they face potential reputational damage that could affect shareholder wealth, or when it represents a good marketing move, so called "woke-washing". The analysis also supports and reinforces the view 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. However, our results highlight how size matters in the stakeholder capitalism debate. Stakeholder pressure on management can be an important and effective factor in achieving a socially desirable outcome, but it tends to focus on large, high-profile companies, while other market participants are left free to operate without this meaningful managerial constraint.

TABLE OF CONTENTS

INTRODUCTION..............................................................................................3

I. STAKEHOLDER GOVERNANCE.............................................................9

A. Evolution of the Debate ..............................................................9
B. Current Status of the Debate ..................................................... 12
C. A New Test of Stakeholder Governance..................................... 15

II. CORPORATE RESPONSE TO THE RUSSIAN INVASION...........................16

A. Impact of the Sanctions............................................................. 16

1. Sanctions Imposed by the USA ............................................ 17
2. Sanctions Imposed by the EU.............................................. 19
3. Russian Retaliation .............................................................21
4. Impact on Western Businesses.............................................22

B. Public Pressure ........................................................................22

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1. Political Pressure ...............................................................22
2. Boycott Campaigns .............................................................24
3. Yale School of Management (SOM) List..............................25
4. Stock Prices........................................................................ 26

C. Corporate Reactions.................................................................27

1. Different Responses ............................................................27
2. Different "Justifications"....................................................29

III. EMPIRICAL ANALYSIS.......................................................................31

A. Sample Descriptive Statistics ....................................................32
B. Boycott Campaigns on Twitter ................................................. 35
C. Speed of Announcement ............................................................36
D. Boycott Campaign Virality and Withdrawal from Russia ........... 42

IV. CONTRIBUTIONS AND IMPLICATIONS.................................................49

A. Risks of "Woke-Washing".........................................................49
B. Stakeholder Pressure ................................................................ 51
C. "Stakeholder Governance Gap" ............................................... 52

CONCLUSIONS.............................................................................................53

INTRODUCTION

Since the Russian invasion of Ukraine on February 24, 2022, hundreds of Western companies have taken the unprecedented step of withdrawing from Russia. Some have suggested that corporate reaction to the war represents "a dramatic example of stakeholder capitalism in action."¹

Currently, a heated debate revolves around "stakeholderism" and the need for companies to be managed for the benefit of a broader set of stakeholders and not solely with the goal of maximizing profits. 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. Among stakeholderism supporters, different views are expressed on how to advance stakeholder interests. Some posit that addressing social and environmental concerns is not detrimental to shareholder value, but to the contrary, it is essential for maximizing long-term shareholder wealth. Others believe that stakeholder interests should be

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considered, regardless of the effect on shareholder value, and they entrust corporate leaders with weighing and balancing the constituencies involved.² Critics of stakeholderism argue that stakeholder interests present many tradeoffs that are hard to resolve, and that leaving corporate leaders without a standard for choosing among competing interests simply insulates them from accountability. They also claim that corporate leaders lack incentives to serve stakeholders beyond what would serve shareholder value, and that negative externalities should be left to governments.³ According to a different approach, the shareholder primacy/stakeholder governance frame does not fully account for the important and widespread shift that has recently occurred in the economic and social preferences of stakeholders, which are now demanding to see their social and political values accommodated in the marketplace. In this view, managers' choice and protection of stakeholder interests is the result of increasing pressure on companies from several stakeholder groups to act in a more socially responsible manner.⁴

Considering the corporate reaction to the war in Ukraine within this conceptual framework, supporters of stakeholder governance claim that top executives decided to divest Russian assets and partnerships to sever ties with the aggressor's regime, placing social responsibility over profits.⁵ However, other factors might have played a role in the decisive corporate response to the invasion of Ukraine. The severe economic sanctions imposed on Russia have created a hostile environment for businesses to operate in, and Russian retaliation has specifically targeted foreign companies, threatening to nationalize their assets.⁶ Additionally, employees, customers and politicians have put companies under enormous pressure to exit Russia.⁷ Public campaigns have proved particularly effective after the publication by Yale University management professor Jeffrey Sonnenfeld of a list tracking corporate activity in the aftermath of the invasion of Ukraine. The goal of the list is to push every corporation to publicly commit to leaving Russia, encouraging boycotts of those companies that defy pressure to do so.⁸ Finally, research based on the list shows

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that financial markets are also punishing companies identified as remaining in Russia, while rewarding those that withdraw.⁹ Therefore, the authenticity of corporate support for Ukraine has been questioned, with some seeing the announcement to exit Russia either as a marketing decision to attract positive attention from customers and investors, or as a response to acute pressure from multiple stakeholders.¹⁰

This article examines the corporate response to the Russian invasion of Ukraine through the lens of the stakeholder governance debate. We empirically investigate whether corporate leaders' decision to withdraw business from Russia was adopted according to a stakeholder approach. Under the stakeholder governance hypothesis, company executives were mainly driven by their ethical judgements, wanting to condemn Putin's assault and to promote peace in Ukraine, even at the cost of deviating from shareholder interests. The alternative hypothesis posits the existence of a different possible channel, such as firms' exposure to...