Fundamental Choices for Board Oversight of the Russia-Ukraine Crisis

In boardrooms across the United States, directors are grappling with the recent tragic events in Ukraine. Many organizations have already taken immediate steps to ensure worker and extended family safety, assess the disruptions to supply chains and operations, mitigate the growing cybersecurity threat, comply with sanctions, and plan for what is sure to be an extended period of financial and market volatility.

Beyond immediate actions, however, the Russian invasion of Ukraine raises trust and reputational issues that boards must address with respect to doing business in Russia today and in countries ruled by other autocrats tomorrow. The United States, European Union, and other Western countries have drawn a line in the sand that this invasion is a threat to global security and the security of their citizens. In this respect, today’s events go beyond the existing and long-documented human rights violations in Russia. Given increased demands over the past few years for directors to oversee environmental, social, and governance (ESG) issues, boards will be expected to state their support for this line-in-the-sand approach and take requisite actions to live their companies’ values.

A company that fails to speak with clarity and follow through with appropriate action risks loss of trust and severe reputational damage. Seeking to not punish Russia beyond legal mandates will be viewed as inappropriate and insufficient due to national security threats to sovereign free-market nations. Boards of companies making money through Russian connections can no longer justify the companies’ actions by pointing to short-term economic considerations or framing the businesses’ actions as “business, not politics.” These decisions relate not only to narrow legal, operational, and safety considerations but also to broader and deeper values-based leadership that is expected of the business community and individual corporations today.

To put a fine point on it, businesses have a critical and urgent decision in front of them now: whether or not they act with clear conviction and take a stand on right and wrong. Employees, consumers, and investors are closely watching corporate decisions that go beyond simple compliance with sanctions. Examples from Apple, DirecTV, Microsoft Corp., and others of suspending or withdrawing business operations from Russia out of a sense of a higher responsibility emerge daily. Decisive decisions such as these may lead to negative short-term impacts for profits and shareholders. But the long-term implications for business leadership and corporate success can be profound, from strengthening trust with stakeholders to sending a message to future regimes seeking to manipulate free market democratic values and institutions.

For boards, this decision-making entails evaluating doing business with entities that might provide revenues but also are threats to national security, human rights, and the spirit of ESG. With this in mind, boards should discuss the following questions about strategy and capital investments:

• Do we have investments or joint ventures in Russia or that otherwise need to be suspended or terminated?

• Do we have board members or employees that sit on the boards of these other entities? Do we have board members or employees that benefit financially or otherwise from relationships with Russian entities or other authoritarian regimes?

• Do we purchase or sell to companies that are effectively extensions of the Putin regime?

• How strong is our current political risk management approach in terms of assessment, reporting, and mitigation? Do we have a cohesive approach that is aligned with our strategy and incorporates or accounts for our corporate values?

• Are we authentic or reactive and selective in applying our values? How do we think about and incorporate US national interests and security into our long-term and short-term thinking?

The newly emerging world order underscores the growing importance of scenario-based planning as a complement to strategic planning in the boardroom. Recent events also highlight the importance of developing a clear political risk appetite and a strong communications plan. The ability of boards and corporations to act quickly, decisively, and with ethical clarity will increasingly become a necessary quality.

Russia’s invasion of Ukraine has reset how boards must think about doing business with or investing in Russia and other autocratic regimes and corporations that are de facto extensions of those states. Not since World War II has the US business community been confronted with such a fundamental choice about when, where, and how a company conducts its business. US corporations and their boards now have a narrow window to make the right decision. Boards can and should take the lead to help think through these issues while management teams are focused on critical, on-the-ground challenges.

Decisions on this subject are complex and have profound strategic impacts for business. But as an investor at a recent NACD Lead Director Steering Committee meeting shared, “If a company’s strategy depends on a societal failure, it’s a bad strategy.”